<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 7, 1995
REGISTRATION NO. 33-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
FORM N-14
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
<TABLE>
<C> <S>
/ / PRE-EFFECTIVE AMENDMENT NO.
/ / POST-EFFECTIVE AMENDMENT NO.
</TABLE>
(Check appropriate box or boxes)
------------------
PRUDENTIAL GOVERNMENT
SECURITIES TRUST
(Exact name of registrant as specified in charter)
ONE SEAPORT PLAZA
NEW YORK, NEW YORK 10292
(Address of Principal Executive Offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 214-1250
------------------
S. JANE ROSE, ESQ.
ONE SEAPORT PLAZA
NEW YORK, NEW YORK 10292
(Name and Address of Agent for Service)
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
As soon as practicable after the effective
date of the Registration Statement.
------------------
REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION
8(A), MAY DETERMINE.
NO FILING FEE IS REQUIRED BECAUSE, PURSUANT TO RULE 24F-2 UNDER THE
INVESTMENT COMPANY ACT OF 1940, REGISTRANT HAS PREVIOUSLY REGISTERED AN
INDEFINITE NUMBER OF SHARES OF BENEFICIAL INTEREST, PAR VALUE $.01 PER SHARE,
PURSUANT TO A REGISTRATION STATEMENT ON FORM N-1A (FILE NO. 2-74139). PURSUANT
TO RULE 429 UNDER THE SECURITIES ACT OF 1933, THE PROXY STATEMENT/PROSPECTUS
RELATES TO SHARES PREVIOUSLY REGISTERED ON FORM N-1A (FILE NO. 2-74139).
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
CROSS REFERENCE SHEET
(AS REQUIRED BY RULE 481(A) UNDER THE SECURITIES ACT OF 1933)
<TABLE>
<CAPTION>
PROSPECTUS/PROXY
N-14 ITEM NO. AND CAPTION STATEMENT CAPTION
- ------------------------------------------------------- -------------------------------------
<C> <S> <C>
PART A
Item 1. Beginning of Registration Statement and
Outside Front Cover Page of Prospectus.... Cover Page
Item 2. Beginning and Outside Back Cover Page of
Prospectus................................ Table of Contents
Item 3. Synopsis Information and Risk Factors....... Synopsis; Principal Risk Factors
Item 4. Information about the Transaction........... Synopsis; The Proposed Transaction
Item 5. Information about the Registrant............ Additional Information about
Intermediate Series
Item 6. Information about the Company Being Additional Information about
Acquired.................................. Adjustable Rate Fund
Item 7. Voting Information.......................... Voting Information
Item 8. Interest of Certain Persons and Experts..... Not Applicable
Item 9. Additional Information Required for
Reoffering by Persons Deemed to be
Underwriters.............................. Not Applicable
<CAPTION>
STATEMENT OF ADDITIONAL INFORMATION
CAPTION
-------------------------------------
<C> <S> <C>
PART B
Item 10. Cover Page.................................. Cover Page
Item 11. Table of Contents........................... Cover Page
Item 12. Additional Information about the Statement of Additional Information
Registrant................................ of Intermediate Series dated April 3,
1995.
Item 13. Additional Information about the Company
Being Acquired............................ Not Applicable
Item 14. Financial Statements........................ Statement of Additional Information
of Intermediate Series dated April 3,
1995; Annual Report to shareholders
of Adjustable Rate Fund for the
fiscal year ended February 28,
1995; pro forma financial
statements included in the
Statement of Additional Information
of Intermediate Series dated June
, 1995 relating to the
acquisition of assets of Adjustable
Rate Fund by Intermediate Series in
exchange for shares of the
Intermediate Series.
PART C
Information required to be included in Part C is set forth under the appropriate item, so
numbered, in Part C of this Registration Statement.
</TABLE>
<PAGE> 3
PRELIMINARY COPY
PRUDENTIAL ADJUSTABLE RATE SECURITIES FUND, INC.
ONE SEAPORT PLAZA
NEW YORK, NEW YORK 10292
---------------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
---------------------------
To our Shareholders:
Notice is hereby given that a Special Meeting of Shareholders of Prudential
Adjustable Rate Securities Fund, Inc. (Adjustable Rate Fund) will be held at
3:00 P.M. on August 15, 1995, at 199 Water Street, New York, N.Y. 10292, for the
following purposes:
1. To approve an Agreement and Plan of Reorganization and Liquidation
whereby all of the assets of Adjustable Rate Fund will be transferred to
Prudential Government Securities Trust -- Intermediate Term Series
(Intermediate Series) in exchange for shares of Intermediate Series, and
Intermediate Series will assume all of the liabilities, if any, of
Adjustable Rate Fund.
2. To consider and act upon any other business as may properly come
before the Meeting or any adjournment thereof.
Only shares of common stock of Adjustable Rate Fund of record at the close
of business on May 26, 1995, are entitled to notice of and to vote at this
Meeting or any adjournment thereof.
S. JANE ROSE,
Secretary
Dated: June , 1995
WHETHER OR NOT YOU EXPECT TO ATTEND THE MEETING, PLEASE SIGN AND PROMPTLY RETURN
THE ENCLOSED PROXY IN THE ENCLOSED SELF-ADDRESSED ENVELOPE. IN ORDER TO AVOID
THE ADDITIONAL EXPENSE OF FURTHER SOLICITATION, WE ASK YOUR COOPERATION IN
MAILING IN YOUR PROXY PROMPTLY.
<PAGE> 4
PRELIMINARY COPY
PRUDENTIAL GOVERNMENT SECURITIES TRUST
(INTERMEDIATE TERM SERIES)
PROSPECTUS
AND
PRUDENTIAL ADJUSTABLE RATE SECURITIES FUND, INC.
PROXY STATEMENT
ONE SEAPORT PLAZA
NEW YORK, NEW YORK 10292
(800) 225-1852
------------------
Prudential Adjustable Rate Securities Fund, Inc. (Adjustable Rate Fund) has
registered as an open-end, diversified management investment company. Prudential
Government Securities Trust -- Intermediate Term Series (Intermediate Series) is
a series of Prudential Government Securities Trust, which has registered as an
open-end, diversified management investment company. Both Adjustable Rate Fund
and Intermediate Series (collectively, the Funds) are managed by Prudential
Mutual Fund Management, Inc. (PMF or the Manager) and have the same office
address. The investment objective of Adjustable Rate Fund is high current income
consistent with low volatility of principal. The investment objective of
Intermediate Series is to achieve a high level of income consistent with
providing reasonable safety.
This Prospectus and Proxy Statement is being furnished to shareholders of
Adjustable Rate Fund in connection with a proposed Agreement and Plan of
Reorganization and Liquidation (the Plan), whereby Intermediate Series will
acquire all of the assets of Adjustable Rate Fund and assume the liabilities, if
any, of Adjustable Rate Fund. If the Plan is approved by Adjustable Rate Fund's
shareholders, all such shareholders will be issued shares of Intermediate Series
in place of the shares of Adjustable Rate Fund held by them, and Adjustable Rate
Fund will be liquidated. Shareholders of Intermediate Series are not being asked
to vote on the Plan.
This Prospectus and Proxy Statement sets forth concisely information about
Intermediate Series that prospective investors should know before investing.
This Prospectus and Proxy Statement is accompanied by the Prospectus of
Intermediate Series, dated April 3, 1995, including a May 12, 1995 Supplement
thereto, and the Prospectus of Adjustable Rate Fund, dated June , 1995, which
Prospectuses are incorporated by reference herein, and the Annual Report to
Shareholders of Adjustable Rate Fund for the fiscal year ended February 28,
1995. The Statement of Additional Information of Adjustable Rate Fund, dated
June , 1995, and the Statement of Additional Information of Intermediate Series,
dated April 3, 1995, have been filed with the Securities and Exchange Commission
(SEC), are incorporated herein by reference and are available without charge
upon written request to Prudential Mutual Fund Services, Inc., Raritan Plaza
One, Edison, New Jersey 08837 or by calling the toll-free number above.
Additional information, contained in a Statement of Additional Information,
dated June , 1995, forming a part of Intermediate Series' Registration
Statement on Form N-14, has been filed with the SEC, is incorporated herein by
reference and is available without charge upon request to the address or
telephone number shown above.
This Prospectus and Proxy Statement will first be mailed to shareholders on
or about June 30, 1995.
Investors are advised to read and retain this Prospectus and Proxy
Statement for further 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.
The date of this Prospectus and Proxy Statement is June , 1995.
1
<PAGE> 5
PRUDENTIAL GOVERNMENT SECURITIES TRUST
(INTERMEDIATE TERM SERIES)
PRUDENTIAL ADJUSTABLE RATE SECURITIES FUND, INC.
ONE SEAPORT PLAZA
NEW YORK, NEW YORK 10292
---------------------
PROSPECTUS AND PROXY STATEMENT DATED JUNE , 1995
---------------------
SYNOPSIS
The following synopsis is a summary of certain information contained
elsewhere in this Prospectus and Proxy Statement and the Agreement and Plan of
Reorganization and Liquidation and is qualified by reference to the more
complete information contained herein as well as in the Prudential Adjustable
Rate Securities Fund, Inc. (Adjustable Rate Fund) Prospectus and the enclosed
Prudential Government Securities Trust -- Intermediate Term Series (Intermediate
Series) Prospectus. Shareholders should read the entire Prospectus and Proxy
Statement carefully.
GENERAL
This Proxy Statement is furnished by the Board of Directors of Adjustable
Rate Fund in connection with the solicitation of Proxies for use at a Special
Meeting of Shareholders of Adjustable Rate Fund (the Meeting) to be held at 3:00
P.M., on August 15, 1995 at 199 Water Street, New York, New York 10292,
Adjustable Rate Fund's principal executive office. The purpose of the Meeting is
to approve or disapprove an Agreement and Plan of Reorganization and Liquidation
(the Plan) whereby all of the assets of Adjustable Rate Fund will be acquired
by, and the liabilities of Adjustable Rate Fund, if any, will be assumed by,
Intermediate Series, and such other business as may properly come before the
Meeting or any adjournment thereof. The Plan is attached to this Prospectus and
Proxy Statement as Appendix B. The transactions contemplated by the Plan are set
forth herein and in summary provide that Intermediate Series will acquire the
assets, in exchange solely for shares of beneficial interest in Intermediate
Series, and assume the liabilities, if any, of Adjustable Rate Fund.
Approval of the Plan requires the affirmative vote of a majority of shares
of Adjustable Rate Fund outstanding and entitled to vote. Shareholders vote in
the aggregate and not by separate class. Approval of the Plan by the
shareholders of Intermediate Series is not required and the Plan is not being
submitted for their approval.
THE PROPOSED REORGANIZATION AND LIQUIDATION
The Board of Directors of Adjustable Rate Fund and the Trustees of
Intermediate Series have approved the Plan, which provides for the transfer of
all of the assets of Adjustable Rate Fund to Intermediate Series in exchange
solely for shares of beneficial interest in Intermediate Series and the
assumption by Intermediate Series of the liabilities, if any, of Adjustable Rate
Fund. Following shareholder approval, if obtained, shares of Intermediate Series
will be distributed to Class A and Class B shareholders of Adjustable Rate Fund,
and Adjustable Rate Fund will be liquidated. The reorganization will become
effective as soon as practicable after the Meeting. Each Adjustable Rate Fund
Class A and Class B shareholder will receive the number of full and
2
<PAGE> 6
fractional shares of Intermediate Series equal in value (rounded to the third
decimal place) to such shareholder's Class A and Class B shares of Adjustable
Rate Fund as of the closing date.
For the reasons set forth below under "-- Reasons for the Proposed
Reorganization and Liquidation" and "The Proposed Transaction -- Reasons for the
Reorganization and Liquidation," the Board of Directors of Adjustable Rate Fund
and the Trustees of Intermediate Series, including those Directors/Trustees who
are not "interested persons" (Independent Directors/Trustees) as that term is
defined in the Investment Company Act of 1940, as amended (Investment Company
Act), have concluded that the reorganization would be in the best interests of
the shareholders of Adjustable Rate Fund and Intermediate Series and that the
interests of shareholders of each Fund will not be diluted as a result of the
proposed transaction. Accordingly, the Board of Directors of Adjustable Rate
Fund and the Trustees of the Intermediate Series recommend approval of the Plan.
REASONS FOR THE PROPOSED REORGANIZATION AND LIQUIDATION
There are a number of similarities between the Funds. Each Fund is an
open-end, diversified investment company primarily seeking high income with
reasonable safety. Both Funds invest a significant portion of their assets in
U.S. Government and agency securities, although Adjustable Rate Fund, unlike
Intermediate Series, may also invest in asset-backed securities, corporate and
other debt obligations. However, the Trustees of Intermediate Series recently
approved modifications to the investment policies and restrictions of
Intermediate Series which will be submitted to shareholders of the Intermediate
Series for their approval at a special meeting scheduled to be held on or about
July 19, 1995 (the Special Meeting) authorizing Intermediate Series to, among
other things, invest in asset-backed securities, corporate and other debt
obligations similar to those in which Adjustable Rate Fund may invest. Should
the shareholders of the Intermediate Series approve the proposed modifications,
the investment policies of the Funds will be more closely aligned. Shareholders
of Adjustable Rate Fund should be aware that approval of these modifications by
Intermediate Series' shareholders is not a condition to completion of the
transactions described in this Proxy and Prospectus. In addition, there can be
no assurance that any or all of such modifications will be approved. For a
summary of the proposed modifications, see "-- Investment Objectives and
Policies" below.
The Funds are also similar in that: Prudential Mutual Fund Management, Inc.
(PMF or the Manager) serves as Manager to both Funds; The Prudential Investment
Corporation (PIC) serves as subadviser to both Funds; Prudential Securities
Incorporated (PSI) acts as the Distributor of the shares of Intermediate Series
and the Class B shares of Adjustable Rate Fund; and Prudential Mutual Fund
Services, Inc. (PMFS) is the Transfer Agent and Dividend Disbursing Agent for
each of the Funds. In addition, both Funds pay dividends of net investment
income, if any, monthly and make distributions of any net capital gains at least
annually.
Barbara L. Kenworthy, a managing director and senior portfolio manager of
Prudential Investment Advisors, a unit of PIC, is the portfolio manager of both
the Adjustable Rate Fund and the Intermediate Series. She is responsible for the
day to day management of the portfolios. Ms. Kenworthy succeeded David Graham in
managing the portfolios in May 1995, when Mr. Graham resigned from PIC. Ms.
Kenworthy joined PIC in July 1994, having previously been employed by The
Dreyfus Corporation (from June 1985 to June 1994) where she served as president
and portfolio manager for several Dreyfus fixed-income funds. Ms. Kenworthy also
serves as the portfolio manager of other investment companies advised by PIC.
There are also a number of differences between the Funds. See "-- Certain
Differences Between Intermediate Series and Adjustable Rate Fund" below.
Adjustable Rate Fund was incorporated on December 23, 1991, as a Maryland
corporation and commenced investment operations on June 10, 1992. Adjustable
Rate Fund has, in the current market
3
<PAGE> 7
environment, been unable to attract sufficient new assets to offset redemptions
and has incurred increased expense ratios. As of April 30, 1995, Adjustable Rate
Fund had approximately $56 million in assets, which represents a 56% decline in
net assets from approximately $128 million at February 28, 1994. As of February
28, 1994, net assets had decreased by 50% from approximately $258 million at
February 28, 1993. This decline in assets is not unique to Adjustable Rate Fund.
Total assets in the adjustable rate fund universe compiled by Lipper Analytical
Services, Inc. declined from $22 billion (52 funds) at the end of 1992, to
approximately $20 billion (74 funds) at the end of 1993, and then to
approximately $10 billion (87 funds) at the end of 1994. This suggests that the
fund category, not just Adjustable Rate Fund itself, may not be meeting a market
need.
As a result of the decline in net assets, Adjustable Rate Fund has
experienced rising expense ratios and does not enjoy the economies of scale of
Intermediate Series. The ratio of total expenses to average net assets for the
Intermediate Series was .84% for the fiscal year ended November 30, 1994 while
the ratio of total expenses to average net assets for the Class A and Class B
shares of Adjustable Rate Fund was 1.07% and 1.03%, respectively, for the fiscal
year ended February 28, 1995. Adjustable Rate Fund shareholders have been
partially shielded from the rising expense ratios by virtue of the temporary
abatement of expenses incurred pursuant to plans adopted under Rule 12b-1 under
the Investment Company Act (12b-1 Plans) and related distribution and service
agreements. As of April 14, 1993, the distributor of Class B shares of
Adjustable Rate Fund no longer had any distribution expenses to be reimbursed by
Adjustable Rate Fund or to be recovered through contingent deferred sales
charges. Therefore, Adjustable Rate Fund has since then discontinued assessing
12b-1 fees on Class B shares unless or until the distributor incurs additional
costs reimbursable to it under the Class B 12b-1 Plan. In light of the fact that
Class B shares automatically convert to Class A shares after approximately one
year from purchase, the distributor of the Class A shares has agreed,
temporarily and voluntarily, to waive all payments to it under the Class A 12b-1
Plan. Class A shares to which the voluntary waiver applies currently constitute
almost 99% of Adjustable Rate Fund's assets. Taking into account the then
current level of fees charged under Adjustable Rate Fund's Class A and Class B
12b-1 Plans (without regard to the waiver or nonassessment of the respective
12b-1 fees), the ratio of total expenses to average net assets for the Class A
and Class B shares of Adjustable Rate Fund would have been 1.57% and 2.03%,
respectively, as of the fiscal year ended February 28, 1995 as compared to .84%
for the Intermediate Series for the fiscal year ended November 30, 1994. Should
the proposed reorganization be consummated, shareholders will be subject to the
fee applicable to Intermediate Series pursuant to its 12b-1 Plan, which is
charged at the rate of up to .25 of 1% of Intermediate Series' average daily net
assets.
Below is total return information for the Class A and Class B shares of
Adjustable Rate Fund for the fiscal years ended February 28, 1993, 1994 and
1995, and for the shares of Intermediate Series for the fiscal years ended
November 30 since 1985. The following table is derived from the "Financial
Highlights" of each Fund. "Financial Highlights" for Intermediate Series are set
forth in Intermediate Series' Prospectus, which accompanies this Prospectus and
Proxy Statement and below under "Information about Intermediate
4
<PAGE> 8
Series -- Financial Information." "Financial Highlights" for Adjustable Rate
Fund are set forth in Adjustable Rate Fund's Prospectus and Annual Report, each
of which accompanies this Prospectus and Proxy Statement.
<TABLE>
<CAPTION>
ADJUSTABLE RATE FUND
------------------------------------------------------
CLASS A CLASS B
------------------------ ------------------------
JUNE JUNE
10, 10,
YEAR YEAR 1992* YEAR YEAR 1992*
ENDED ENDED THROUGH ENDED ENDED THROUGH
FEBRUARY FEBRUARY FEBRUARY FEBRUARY FEBRUARY FEBRUARY
28, 28, 28, 28, 28, 28,
1995 1994 1993 1995 1994 1993
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
TOTAL RETURN**........... 3.07% 1.24% 2.92% 2.96% 1.58% 2.56%
</TABLE>
- ---------------
* Commencement of investment operations.
** Total return does not consider the effect of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestments of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
<TABLE>
<CAPTION>
INTERMEDIATE SERIES
----------------------------------------------------------------------------------
YEAR ENDED NOVEMBER 30,
----------------------------------------------------------------------------------
1994 1993 1992 1991 1990 1989 1988 1987 1986 1985
------ ---- ---- ----- ---- ----- ---- ---- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
TOTAL RETURN*............ (2.58)% 8.26% 7.40% 12.19% 6.73% 11.12% 6.47% 1.87% 16.48% 15.67%
</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.
The proposed transaction would give Intermediate Series the opportunity to
increase its assets by acquiring securities consistent with its investment
objective and policies in exchange for the issuance of its shares.
The Board of Directors of Adjustable Rate Fund has determined that approval
of the Plan would be in the best interests of Adjustable Rate Fund and its
shareholders for the reasons discussed above. See, also, "The Proposed
Transaction -- Reasons for the Reorganization and Liquidation" below.
CERTAIN DIFFERENCES BETWEEN INTERMEDIATE SERIES AND ADJUSTABLE RATE FUND
While the investment objective of both Funds is similar, there are
important differences between the Funds. The investment objective of
Intermediate Series is to achieve a high level of income consistent with
providing reasonable safety. Intermediate Series has sought to achieve this
objective by investing principally (at least 80% of total assets) in a
diversified portfolio of intermediate-term securities (primarily 3 to 5 year
maturities) issued or guaranteed by the United States Government, its agencies
or instrumentalities, including mortgage-backed "pass-through" securities, such
as those issued by the Government National Mortgage Association (GNMA) and the
Federal National Mortgage Association (FNMA), and repurchase agreements. While
the investment objective of Adjustable Rate Fund is high current income
consistent with low volatility of principal, it has sought to achieve its
objective by investing at least 65% of its assets in adjustable rate securities,
including mortgage-backed securities issued or guaranteed by private
institutions or the U.S. Government, its agencies or its instrumentalities,
asset-backed securities, and corporate or other debt obligations, all of which
have interest rates which reset at periodic intervals, with the remaining 35% of
its total assets being invested in fixed rate securities. Additionally, all
securities purchased by Adjustable Rate Fund must be rated at least "A" by
Moody's Investors Service, Inc. (Moody's) or Standard & Poor's Ratings Group
(S&P) or if unrated, determined to be of comparable quality by the Fund's
investment adviser.
5
<PAGE> 9
The investment policies of Adjustable Rate Fund have permitted greater
investment flexibility than the investment policies of Intermediate Series.
Adjustable Rate Fund may purchase put and call options and sell covered call
options on national exchanges and in the over-the-counter markets as well as
enter into futures contracts and options on futures contracts, interest rate
swap transactions and short sales. Adjustable Rate Fund and the Intermediate
Series may each borrow for certain purposes although (i) Intermediate Series may
pledge only up to 20% of its total assets to secure borrowings whereas
Adjustable Rate Fund may pledge up to 33 1/3% of its total assets to secure
borrowings and (ii) Adjustable Rate Fund may borrow to take advantage of
investment opportunities while Intermediate Series may borrow only for temporary
or emergency purposes. With respect to illiquid securities, Intermediate Series
may invest up to 10% of its assets in securities for which there is no readily
available market whereas Adjustable Rate Fund may invest up to 15% of its net
assets in such securities.
Unlike Intermediate Series, which currently offers one class of shares sold
without a sales charge imposed either at time of purchase or on a deferred
basis, Adjustable Rate Fund offers Class A shares, which are sold with a sales
charge imposed at time of purchase, and Class B shares, which may be subject to
a sales charge on a deferred basis.
In determining whether to approve the Plan, shareholders of Adjustable Rate
Fund should consider that the Trustees of Intermediate Series recently approved
certain modifications to the investment policies and fundamental restrictions
for Intermediate Series which may have a significant effect on Intermediate
Series. It is anticipated that such modifications will be submitted to
shareholders of Intermediate Series on or about July 19, 1995 for their approval
at the Special Meeting. For a description of the proposed modifications, see
"-- Investment Objectives and Policies" below. Such modifications, if adopted,
would subject the Intermediate Series to additional investment considerations.
See "Principal Risk Factors" below. Shareholders of Adjustable Rate Fund should
be aware that approval of these modifications by Intermediate Series'
shareholders is not a condition to completion of the transactions described in
this Proxy and Prospectus, and that there can be no assurance that any or all of
such modifications will be approved.
The management fee for Intermediate Series is charged at an annual rate of
.40 of 1% of the Intermediate Series' average daily net assets, whereas
Adjustable Rate Fund is charged a management fee at an annual rate of .50 of 1%
of its average daily net assets. If the proposed reorganization is consummated,
Adjustable Rate Fund shareholders will receive shares of Intermediate Series and
such shareholders will be subject to Intermediate Series' lower management fee.
Intermediate Series shareholders are subject to a distribution and service
fee that reimburses PSI for its expenses at an annual rate of the lesser of (a)
.25 of 1% per annum of the aggregate sales of the Intermediate 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 12b-1 Plan) or (b) .25 of 1% per annum of the average daily net asset
value of the Intermediate Series shares issued after the effective date of the
12b-1 Plan.
Approximately 99% of the shareholders of Adjustable Rate Fund hold Class A
shares. The remaining shareholders hold Class B shares. The Class A shareholders
are subject to distribution-related fees charged at an annual rate of up to .50
of 1% of the average daily net assets of the Class A shares based on
reimbursable costs. Prudential Mutual Fund Distributors, Inc. (PMFD), the
distributor of the Class A shares, is currently waiving any distribution-related
fee. The ratio of total expenses to average net assets for the Class A shares
for the fiscal year ended February 28, 1995, was 1.07%. If PMFD did not waive
its distribution-related fee the expense ratio would have been 1.57%. Class B
shareholders of Adjustable Rate Fund pay a distribution-related fee to PSI based
upon reimbursable costs. This fee is currently not being assessed because PSI
has no
6
<PAGE> 10
reimbursable costs. If there are reimbursable costs, such fee is payable at an
annual rate up to 1% of the average daily net assets of Adjustable Rate Fund's
Class B shares. If the proposed reorganization is consummated, Class A and Class
B shareholders of Adjustable Rate Fund will be subject to a lower rate of
distribution-related fee (.50 of 1% or 1%, respectively, versus the Intermediate
Series rate of .25 of 1%). In addition, if Intermediate Series' shareholders
approve a proposed change to the Intermediate Series' 12b-1 Plan from a
reimbursement to a compensation plan at the Special Meeting, and the proposed
reorganization is consummated, Adjustable Rate Fund shareholders' fees would no
longer be based upon reimbursable costs. The ratio of total expenses to average
net assets for the Class B shares for the fiscal year ended February 28, 1995,
was 1.03%. If there were reimbursable costs and the maximum amount of expenses
were incurred under the 12b-1 Plan, the expense ratio with respect to Class B
shares would have been 2.03%. The ratio of total expenses to average net assets
for the Intermediate Series was .84% for the fiscal year ended November 30,
1994. If the proposed reorganization is consummated, Adjustable Rate Fund Class
A and Class B shareholders would be subject to Intermediate Series' lower
distribution-related fee rate.
As of November 30, 1994, distribution expenses of Intermediate Series have
exceeded the maximum amount payable under its 12b-1 Plan by $11,346,000. As long
as the Intermediate Series' current 12b-1 Plan remains in effect, such amount
will be carried forward and may be recovered by PSI in the future from the
assets of Intermediate Series. If the transaction is approved and such amounts
are paid by Intermediate Series in the future, shareholders of Adjustable Rate
Fund may bear a part of the cost of repayment. As mentioned above, at the
Special Meeting, shareholders of Intermediate Series will be asked to approve
changing its 12b-1 Plan from a "reimbursement" plan to a "compensation" plan. If
this change is approved by Intermediate Series shareholders, any such previously
expended amounts will no longer be carried forward. Amounts expended under the
Adjustable Rate Fund 12b-1 Plans have not exceeded the maximum amounts payable
under its 12b-1 Plans. If Intermediate Series' shareholders approve the change,
and if the proposed reorganization is consummated, Adjustable Rate Fund
shareholders would become subject to a 12b-1 Plan that compensates the
distributor for providing distribution-related services, rather than reimbursing
the distributor for expenses actually incurred. Although the annual maximum fee
rate applicable to Intermediate Series would continue to be .25 of 1% under the
amended 12b-1 Plan, the amounts payable under the 12b-1 Plan would no longer
directly relate to the expenses actually incurred. Consequently, if the
distributor's expenses are less than its fees under the amended plan, the
distributor would retain its full fees and realize a profit. However, if the
distributor's expenses exceed the distribution and service fees received under
the 12b-1 Plan, the distributor would not be able to carry forward the excess
for reimbursement in future years.
PMFS, as Transfer Agent and Dividend Disbursing Agent for each of the
Funds, receives fees which include an annual fee per shareholder account ($13 in
the case of Intermediate Series and $15 in the case of Adjustable Rate Fund), a
$2 new set-up fee for each manually-established account and a monthly inactive
zero balance account fee per shareholder account. If the proposed reorganization
is consummated Adjustable Rate Fund shareholders would be subject to
Intermediate Series' lower annual fee.
The organizational structure of each Fund is different. Intermediate Term
Series is a separate portfolio of a Massachusetts business trust. Adjustable
Rate Fund is a Maryland corporation. See "Structure of Intermediate Series and
Adjustable Rate Fund" and "Certain Comparative Information About the Funds"
below.
STRUCTURE OF INTERMEDIATE SERIES AND ADJUSTABLE RATE FUND
Prudential Government Securities Trust is organized as a Massachusetts
business trust and its Declaration of Trust permits the Trustees to issue an
unlimited number of full and fractional shares of beneficial interest in
separate series and classes within such series. Prudential Government Securities
Trust consists of
7
<PAGE> 11
three separate portfolios, one of which is the Intermediate Series. The
Intermediate Series consists of one class of shares. Each shareholder is
entitled to a full vote for each full share ($.01 par value per share) of
beneficial interest held. Each share is equal as to earnings, assets and voting
privileges, and there are no conversion, preemptive or other subscription
rights. In the event of liquidation, each share of Intermediate Series is
entitled to its portion of all of such Fund's assets after all debts and
expenses of that Fund have been paid.
Adjustable Rate Fund is organized as a Maryland corporation and is
authorized to issue 2 billion shares of common stock, $.001 par value per share,
divided into two classes designated Class A and Class B common stock, each of
which consists of 1 billion authorized shares. Both Class A and Class B common
stock represent an interest in the same assets of the Fund and are identical in
all respects except that each class bears certain distribution expenses and has
exclusive voting rights with respect to its distribution fee. The Fund has
received an order of the Securities and Exchange Commission (SEC) permitting the
issuance and sale of multiple classes of common stock. Currently, the Fund is
offering only two classes, designated as Class A and Class B shares. Each share
of each class of common stock is equal as to earnings, assets and voting
privileges, except as noted above, and each class bears the expenses related to
the distribution of its shares. Except for the conversion feature applicable to
the Class B shares, there are no conversion, preemptive or other subscription
rights. In the event of liquidation, each share of common stock of Adjustable
Rate Fund is entitled to its portion of all of such Fund's assets after all debt
and expenses of that Fund have been paid. Since Class B shares generally bear
higher distribution expenses than Class A shares, the liquidation proceeds to
shareholders of Class B shares are likely to be lower than to Class A
shareholders.
Both Adjustable Rate Fund's Articles of Incorporation and Prudential
Government Securities Trust's Declaration of Trust permit each Fund's respective
Directors/Trustees to authorize the creation of additional series of common
stock/beneficial interest and classes within such series, with such preferences,
privileges, limitations and voting and dividend rights as the Directors/Trustees
may determine. The Directors/Trustees may increase the number of authorized
shares without the approval of shareholders. Shares of each Fund, when issued as
described in each Fund's Prospectus, are fully paid, nonassessable, fully
transferable and redeemable at the option of the holder. Shares are also
redeemable at the option of each Fund under certain circumstances. Neither
Fund's shares have cumulative voting rights for the election of its respective
Directors/Trustees.
INVESTMENT OBJECTIVES AND POLICIES
The investment objective of Intermediate Series is to achieve a high level
of income consistent with providing reasonable safety by investing in a
diversified portfolio of intermediate term securities issued or guaranteed by
the United States Government or its agencies or instrumentalities. There is no
assurance that the Intermediate Series' investment objective will be achieved.
As of the date of this Proxy and Prospectus, Intermediate Series will invest at
least 80% of its total assets in these types of government securities. However,
the Trustees of the Intermediate Series recently approved modifications to the
investment policies and restrictions of the Intermediate Series which will be
submitted to shareholders of the Intermediate Series for their approval at the
Special Meeting. The changes to the Intermediate Series' investment policies and
restrictions are summarized below.
A number of the Intermediate Series' investment policies and restrictions
are proposed to be eliminated or modified which would permit the Intermediate
Series, among other things, (1) to reduce the percentage of its total assets
which must be invested in government securities to 65% (currently 80%); (2) to
invest up to 35% of its total assets in corporate and other
non-governmental/agency debt obligations, including, but not limited to,
collateralized mortgage obligations, stripped mortgaged-backed securities and
asset-backed
8
<PAGE> 12
securities rated at least A by S&P or Moody's or, if unrated, determined to be
of comparable quality by the investment adviser; (3) to shorten its maximum
weighted average maturity to 5 years (currently 10 years) and change its name to
the "Short-Intermediate Term Series"; (4) to invest up to 15% of its net assets
in securities with legal or contractual restrictions on resale and other
illiquid securities; (5) to enter into interest rate swap transactions; (6) to
purchase and sell financial futures contracts and options thereon; (7) to enter
into short sales; and (8) to increase its borrowing limit to 33 1/3% from 20% of
its total assets and to borrow to take advantage of investment opportunities. If
approved, the proposed modifications of Intermediate Series' investment policies
will subject Intermediate Series' shareholders to certain additional risks. See
"Principal Risk Factors" below.
Should the shareholders of Intermediate Series approve the above changes,
the investment policies of the Funds will be more closely aligned. Approval of
the proposed changes by the shareholders of Intermediate Series, however, is not
a condition to completion of the transactions described in the Plan. In
addition, there can be no assurance that any or all of these proposed
modifications will be approved by the shareholders of Intermediate Series.
The investment objective of Adjustable Rate Fund is high current income
consistent with low volatility of principal. Adjustable Rate Fund seeks to
achieve its objective by investing, under normal circumstances, at least 65% of
its total assets in adjustable rate securities, including mortgage-backed
securities issued or guaranteed by private institutions or the U.S. Government,
its agencies or instrumentalities, asset-backed securities and corporate and
other debt obligations, all of which have interest rates which reset at periodic
intervals. The Fund may invest the remainder of its assets in fixed rate
securities. The Fund expects that under normal market conditions at least 75% of
the value of the securities purchased by the Fund (excluding options and
futures) will be rated "AA" or "AAA" by S&P or "Aa" or "Aaa" by Moody's or, if
unrated, will be determined to be of comparable quality by the Manager. The Fund
expects that under normal market conditions the remaining 25% of the value of
the securities purchased by the Fund (excluding options and futures) will be
rated "A" by Moody's or S&P or, if unrated, determined to be of comparable
quality by the investment adviser. The Fund may also purchase and sell put and
call options on securities and financial indices and engage in transactions
involving futures contracts and related options. While these options and futures
contracts are not themselves rated, the securities acquired pursuant to these
options and futures contracts will be rated at least "A" by S&P or Moody's or,
if unrated, will be determined to be of comparable quality by the investment
adviser. In addition, the Fund may engage in short selling and use leverage,
including reverse repurchase agreements, dollar rolls and bank borrowings, which
entails additional risks to the Fund. There can be no assurance that Adjustable
Rate Fund's investment objective will be achieved.
The portfolio manager of Intermediate Series anticipates some realignment
of the combined Fund's investment portfolio following the consummation of the
transaction. Adjustable Rate Fund is generally a shorter-term fund with an
average maturity of 1-2 years. Intermediate Series is an intermediate term fund
with average maturity between 3-5 years and a maximum average maturity of any
single holding of 10 years. It is anticipated that the combined Fund will have a
short-intermediate term position with a maximum weighted average maturity of 3-5
years.
Under normal circumstances Adjustable Rate Fund invests at least 65% of its
total assets in adjustable rate securities. The Intermediate Series can invest
in adjustable rate securities and may commit any amount of total assets towards
investment in such securities. It is anticipated that the investment adviser of
the combined Fund will not commit a specific percentage of the Fund's total
assets to adjustable rate securities, but rather will select among fixed-income
and adjustable rate securities as it deems appropriate to meet the combined
Fund's investment objective and investment maturity guidelines. The combined
Fund's investment objective is to achieve a high level of income consistent with
providing reasonable safety.
9
<PAGE> 13
FEES AND EXPENSES
MANAGEMENT FEES. PMF, the Manager of each Fund and a wholly-owned
subsidiary of The Prudential Insurance Company of America (Prudential), is
compensated, pursuant to a management agreement with Adjustable Rate Fund, at an
annual rate of .50 of 1% of the average daily net assets of Adjustable Rate
Fund, and, pursuant to a management agreement with Intermediate Series, at an
annual rate of .40 of 1% of the average daily net assets of Intermediate Series.
Under Subadvisory Agreements between PMF and PIC with respect to both
Funds, PIC, as Subadviser, provides investment advisory services for the
management of each Fund. Pursuant to the Subadvisory Agreements, PMF will
reimburse PIC for its reasonable costs and expenses in providing subadvisory
services. PMF continues to have responsibility for all investment advisory
services pursuant to the Management Agreements for both Funds and supervises the
Subadviser's performance of its services on behalf of each Fund.
DISTRIBUTION FEES. PMFD, a wholly-owned subsidiary of PMF, serves as the
distributor of the Class A shares of Adjustable Rate Fund. Prudential Securities
Incorporated (Prudential Securities or PSI), a wholly-owned subsidiary of
Prudential, serves as the distributor for Class B shares of Adjustable Rate Fund
and for shares of Intermediate Series. PMFD and PSI incur distribution expenses
under separate 12b-1 Plans adopted by each Fund and under separate distribution
agreements. These expenses include (i) commissions and account servicing fees,
(ii) advertising expenses, (iii) the cost of printing and mailing prospectuses
and (iv) indirect and overhead costs associated with the sale of each Fund's
shares.
Intermediate Series, under its 12b-1 Plan, reimburses PSI for its
distribution-related expenses with respect to the Intermediate Series at the
annual rate of the lesser of (a) .25 of 1% per annum of the aggregate sales of
the Intermediate 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 12b-1 Plan.
Such amounts are accrued daily and paid monthly and average daily net assets are
calculated on the basis of Intermediate Series' fiscal year.
Actual distribution expenses for any given year may exceed the fees
received pursuant to the current 12b-1 Plan and will be carried forward and paid
by the Fund in future years so long as the Intermediate Series' current 12b-1
Plan is in effect.
For the fiscal year ended November 30, 1994, PSI received $665,503 from
Intermediate Series under its 12b-1 Plan. It is estimated that PSI spent
$665,503 on behalf of the Series. At November 30, 1994, the aggregate amount of
distribution expenses incurred by PSI and not yet reimbursed by Intermediate
Series was approximately $11,346,000, which represented 4.7% of Intermediate
Series' net assets. These unreimbursed amounts may be recovered by PSI through
future payments under the current 12b-1 Plan.
For the fiscal year ended November 30, 1994, Intermediate Series paid
distribution expenses under its 12b-1 Plan of .21 of 1% of its average net
assets. Intermediate Series records all payments made under its 12b-1 Plan as
expenses in the calculation of its net investment income.
Subject to approval at the Special Meeting, the Intermediate Series' 12b-1
Plan will be changed from a reimbursement type plan to a compensation type plan.
The proposed change will not affect the maximum annual fee payable under
Intermediate Series 12b-1 Plan. If approved, the amount payable under the
Intermediate Series 12b-1 Plan would no longer directly relate to the expense
actually incurred and any amounts previously expended and unreimbursed by
Intermediate Series would no longer be carried forward for possible payment by
the Fund.
10
<PAGE> 14
Adjustable Rate Fund under its 12b-1 Plan with respect to Class A shares
(the Class A Plan) may reimburse PMFD for its distribution-related expenses with
respect to Class A shares at an annual rate of up to .50 of 1% of the average
daily net assets of the Class A shares. The Class A Plan provides that (i) up to
.25 of 1% of the average daily net assets of the Class A shares may be used to
pay for personal service and the maintenance of shareholder accounts (service
fee) and (ii) total distribution fees (including the service fee of .25 of 1%)
may not exceed .50 of 1%. Unlike the 12b-1 Plan with respect to Class B shares
(the Class B Plan), there are no carry forward amounts under the Class A Plan
and interest expenses are not incurred under the Class A Plan.
For the fiscal year ended February 28, 1995, PMFD incurred
distribution-related expenses of $445,344 under the Class A Plan and waived its
entire distribution fee. For this period, PMFD received approximately $1,900 in
initial sales charges. As PMFD has agreed to waive, temporarily and voluntarily,
all payments to it under the Class A Plan, the Fund has discontinued assessing
12b-1 fees on the Class A shares and will not resume assessing such fees unless
and until payments are resumed to PMFD under the Class A Plan. PMFD may
terminate its waiver of payments under the Class A Plan at any time and, in such
event, Adjustable Rate Fund will once again assess 12b-1 fees on the Class A
shares.
Adjustable Rate Fund under its Class B Plan reimburses PSI for its
distribution-related expenses with respect to Class B shares (asset-based sales
charges) at an annual rate of up to .75 of 1% of the average daily net assets of
the Class B shares. PSI recovers the distribution expenses it incurs through the
receipt of reimbursement payments from Adjustable Rate Fund under the Class B
Plan and the receipt of contingent deferred sales charges from certain redeeming
shareholders. For the fiscal year ended February 28, 1995, PSI received
approximately $5,000 in contingent deferred sales charges.
The Class B Plan also provides for the payment of a service fee to PSI at a
rate not to exceed .25 of 1% of the average daily net value of the Class B
shares. The service fee is used to pay financial advisers for personal service
and/or the maintenance of shareholder accounts.
Actual distribution expenses (asset-based sales charges) for Class B shares
for any given year may exceed the fees received pursuant to the Class B Plan and
will be carried forward and paid by Adjustable Rate Fund in future years so long
as the Class B Plan is in effect. Interest is accrued monthly on such carry
forward amounts at a rate comparable to that paid by PSI for bank borrowings.
The aggregate distribution fee for Class B shares (asset-based sales
charges plus service fees) will not exceed the annual rate of 1% of the average
daily net asset value of Class B shares under the Class B Plan.
For the fiscal year ended February 28, 1995, PSI waived all of its
distribution fees under the Class B Plan of $22,789 (1.00% of Class B average
net assets). As of April 14, 1993, the Distributor no longer had any
distribution expenses not yet reimbursed by Adjustable Rate Fund or recovered
through contingent deferred sales charges. Therefore Adjustable Rate Fund has
discontinued assessing any 12b-1 fees on the Class B shares and will not resume
assessing 12b-1 fees on the Class B shares unless and until PSI incurs
additional costs reimbursable to it under the Class B Plan. Until such time, all
contingent deferred sales charges collected on the redemption of Class B shares
will be paid to Adjustable Rate Fund.
For the fiscal year ended February 28, 1995, Adjustable Rate Fund did not
pay distribution expenses relating to either the Class A or Class B shares of
Adjustable Rate Fund. Adjustable Rate Fund records all payments, if any, made
under its Plans as expenses in the calculation of net investment income.
OTHER EXPENSES. Each Fund also pays certain other expenses in connection
with its operation, including accounting, custodian, legal, audit, transfer
agency and registration expenses.
11
<PAGE> 15
FEE WAIVERS AND SUBSIDY. PMF may from time to time waive all or a portion
of its management fee and subsidize all or a portion of the operating expenses
of each Fund. Fee waivers and expense subsidies will increase a fund's yield and
total return. The distributors of the Funds' shares may also from time to time
waive all or a portion of the distribution expenses reimbursable to them under
the Funds' respective 12b-1 Plans. Any fee waiver or subsidy may be terminated
at any time without notice after which a Fund's expenses will increase and its
yield and total return will be reduced.
EXPENSE RATIOS. For the fiscal year ended February 28, 1995, total
expenses stated as a percentage of average net assets of Adjustable Rate Fund
were 1.07% and 1.03% for Class A and Class B shares, respectively, net of PMFD's
distribution fee waiver. For the fiscal year ended November 30, 1994, total
expenses stated as a percentage of average net assets of Intermediate Series
were .84%.
Set forth below is a comparison of each Fund's operating expenses for the
fiscal year ended February 28, 1995, in the case of Adjustable Rate Fund, and
the fiscal year ended November 30, 1994, in the case of Intermediate Series. The
ratios are also shown on a pro forma (estimated) combined basis, giving effect
to the reorganization.
<TABLE>
<CAPTION>
ADJUSTABLE RATE
FUND
----------------- PRO
ANNUAL FUND OPERATING EXPENSES (AS A CLASS CLASS INTERMEDIATE FORMA
PERCENTAGE OF AVERAGE NET ASSETS) A B SERIES COMBINED
- --------------------------------------------- ---- ---- --- ---
<S> <C> <C> <C> <C>
Management Fees.............................. .50% .50% .40% .40%
12b-1 Fees................................... 0* 0 .21 .25
Other Expenses............................... .57 .53 .23 .25
---- ---- --- ---
Total Fund Operating Expenses................ 1.07% 1.03% .84% .90%
==== ==== === ===
</TABLE>
- ---------------
* Fees were waived for the year ended February 28, 1995. Expense ratios had the
fees not been waived would have been 1.57% for the Class A shares.
Set forth below is an example which shows the expenses that an investor in
the combined Fund would pay on a $1,000 investment, based upon the pro forma
ratios set forth above.
<TABLE>
<CAPTION>
1 3 5 10
EXAMPLE YEAR YEARS YEARS 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 $29 $50 $111
You would pay the following expenses on the same
investment, assuming no redemption................... $ 9 $29 $50 $111
</TABLE>
The example should not be considered a representation of past or future
expenses. Actual expenses may be greater or less than those shown.
PURCHASES AND REDEMPTIONS
Purchases of shares of Intermediate Series and Adjustable Rate Fund are
made through PSI, Pruco Securities Corporation (Prusec), or directly from the
respective Fund through their transfer agent, PMFS, at the net asset value per
share next determined after receipt of a purchase order by PMFS, Prusec or PSI
plus, in the case of Adjustable Rate Fund, a sales charge which may be imposed
either (i) at the time of purchase (Class A shares) or (ii) on a deferred basis
(Class B shares).
12
<PAGE> 16
The minimum initial investment for Class A and Class B shares of Adjustable
Rate Fund is $5,000 per class and the minimum subsequent investment is $1,000
for each class. All minimum investment requirements are waived for certain
retirement and employee savings plans or custodial accounts for the benefit of
minors. For purchases of Class B shares made through the Automatic Savings
Accumulation Plan, the minimum initial and subsequent investment is $50. Class A
shares are sold with an initial sales charge of up to 1.00% of the offering
price. Class B shares are sold without an initial sales charge but are subject
to a contingent deferred sales charge of 1% which will be imposed on redemptions
made within one year of purchase. Although Class B shares are subject to higher
ongoing distribution-related expenses than Class A shares, Class B shares will
automatically convert to Class A shares (which are subject to lower ongoing
distribution-related expenses) after the one year contingent deferred sales
charge has expired.
The minimum initial investment in Intermediate Series is $1,000 and the
minimum subsequent investment is $100. There is no minimum investment required
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. Shares of
Intermediate Series are available for purchase without an initial sales charge
or a contingent deferred sales charge.
Shares of each Fund may be redeemed at any time at the net asset value next
determined after PSI or PMFS receives the sell order. As indicated above, the
proceeds of redemptions of Class B shares are subject to a contingent deferred
sales charge. No contingent deferred sales charges will be imposed in connection
with the reorganization.
EXCHANGE PRIVILEGES
Shareholders of both Adjustable Rate Fund and Intermediate Series have an
exchange privilege with certain other Prudential Mutual Funds, including one or
more specified money market funds, subject to the minimum investment
requirements of such funds. Class A and Class B shares of Adjustable Rate Fund
may be exchanged for Class A shares of another fund on the basis of relative net
asset value. No sales charge will be imposed at the time of the exchange. Any
applicable contingent deferred sales charge payable upon the redemption of
shares exchanged will be calculated from the first day of the month after the
initial purchase excluding the time shares were held in a money market fund.
Except for exchanges into the Global Assets Portfolio of the Prudential
Short-Term Global Income Fund, once shares are exchanged out of Adjustable Rate
Fund pursuant to the exchange privilege, they may not be re-exchanged for shares
of Adjustable Rate Fund. Shares of Intermediate Series may be exchanged for
Class A shares of another fund on the basis of the relative net asset value plus
the applicable sales charge (no additional sales charge is imposed in connection
with subsequent exchanges). Intermediate Series shareholders may not exchange
their shares for Class B or Class C shares of the Prudential Mutual Funds,
except in very limited circumstances. With respect to both Funds, an exchange
will be treated as a redemption and purchase for tax purposes.
DIVIDENDS AND DISTRIBUTIONS
Each Fund expects to pay dividends of net investment income, if any,
monthly and make distributions of any net capital gains at least annually.
Shareholders of both Funds receive dividends and other distributions in
additional shares of the Fund unless they elect to receive them in cash. An
Adjustable Rate Fund shareholder's election with respect to reinvestment of
dividends and distributions in Adjustable Rate Fund will be automatically
applied with respect to Intermediate Series shares he or she receives pursuant
to the reorganization.
13
<PAGE> 17
FEDERAL TAX CONSEQUENCES OF PROPOSED REORGANIZATION
Prior to the consummation of the reorganization, the Funds shall have
received an opinion of Shereff, Friedman, Hoffman & Goodman, LLP to the effect
that the proposed reorganization will constitute a tax-free reorganization
within the meaning of Section 368(a)(1)(C) of the Internal Revenue Code of 1986,
as amended (the Internal Revenue Code). Accordingly, no gain or loss will be
recognized to either Fund upon the transfer of assets and the assumption of
liabilities, if any, or to shareholders of Adjustable Rate Fund upon their
receipt of shares of Intermediate Series solely in return for shares of
Adjustable Rate Fund. The tax basis for the shares of Intermediate Series
received by Adjustable Rate Fund shareholders will be the same as their tax
basis for the shares of Adjustable Rate Fund to be constructively surrendered in
exchange therefor. In addition, the holding period of the shares of Intermediate
Series to be received pursuant to the reorganization will include the period
during which the shares of Adjustable Rate Fund to be constructively surrendered
in exchange therefor were held, provided the latter shares were held as capital
assets by the shareholders on the date of the exchange. See "The Proposed
Transaction -- Tax Considerations."
PRINCIPAL RISK FACTORS
Investors in Intermediate Series should recognize that United States
Government securities 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 Intermediate Series 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. The Intermediate 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 and pledge up to 20% of its total assets to secure such
borrowings.
If certain modifications to the investment policies and restrictions of
Intermediate Series are approved by its shareholders at the Special Meeting,
investments in Intermediate Series will be subject to certain risks not
previously present. Such additional risks, however, are many of the same risks
to which investments in Adjustable Rate Fund are currently subject. At the
Special Meeting, shareholders of Intermediate Series will consider, among other
things, modification of Intermediate Series' investment policies and
restrictions to permit the following: (1) to reduce the percentage of its total
assets which must be invested in government securities to 65% (currently 80%);
(2) to invest up to 35% of its total assets in corporate and other non-
governmental/agency debt obligations, including, but not limited to,
collateralized mortgage obligations, stripped mortgaged-backed securities and
asset-backed securities rated at least A by S&P or Moody's or, if unrated,
determined to be of comparable quality by the investment adviser; (3) to shorten
its maximum weighted average maturity to 5 years (currently 10 years) and change
its name to the "Short-Intermediate Term Series"; (4) to invest up to 15% of its
net assets in securities with legal or contractual restrictions on resale and
other illiquid securities; (5) to enter into interest rate swap transactions;
(6) to purchase and sell financial futures contracts and options thereon; (7) to
enter into short sales; and (8) to increase its borrowing limit to 33 1/3% from
20% of its total assets and borrow to take advantage of investment
opportunities.
For a discussion of the risks attendant to such investments, please see
pages 8 through 19 of the Adjustable Rate Fund Prospectus dated June , 1995,
which accompanies this Prospectus and Proxy Statement and is incorporated herein
by reference.
14
<PAGE> 18
THE PROPOSED TRANSACTION
AGREEMENT AND PLAN OF REORGANIZATION AND LIQUIDATION
The terms and conditions under which the proposed transaction may be
consummated are set forth in the Plan. Significant provisions of the Plan are
summarized below; however, this summary is qualified in its entirety by
reference to the Plan, a copy of which is attached as Appendix B to this
Prospectus and Proxy Statement.
The Plan contemplates (i) Intermediate Series acquiring all of the assets
of Adjustable Rate Fund in exchange solely for shares of Intermediate Series and
the assumption by Intermediate Series of Adjustable Rate Fund's liabilities, if
any, as of the Closing Date (hereafter defined) and (ii) the constructive
distribution on the date of the exchange, expected to occur on or about August
24, 1995 (the "Closing Date") of such shares of Intermediate Series to the Class
A and Class B shareholders of Adjustable Rate Fund as provided for by the Plan.
The assets of Adjustable Rate Fund to be acquired by Intermediate Series
shall include, without limitation, all cash, cash equivalents, securities,
receivables (including interest and dividends receivable) and other property of
any kind owned by Adjustable Rate Fund and any deferred or prepaid assets shown
as assets on the books of Adjustable Rate Fund. Intermediate Series will assume
from Adjustable Rate Fund all debts, liabilities, obligations and duties of
Adjustable Rate Fund of whatever kind or name, if any; provided, however, that
Adjustable Rate Fund will utilize its best efforts, to the extent practicable,
to discharge all of its known debts, liabilities, obligations and duties prior
to the Closing Date. Intermediate Series will deliver to Adjustable Rate Fund
shares of Intermediate Series, which Adjustable Rate Fund will then distribute
to its Class A and Class B shareholders.
The value of Adjustable Rate Fund assets to be acquired and liabilities to
be assumed by Intermediate Series and the net asset value of a share of
Intermediate Series will be determined as of 4:15 P.M., New York time, on the
Closing Date will be determined in accordance with the valuation procedures of
the respective Fund's then-current prospectus and statement of additional
information.
As soon as practicable after the Closing Date, Adjustable Rate Fund will
liquidate and distribute pro rata to its shareholders of record the shares of
Intermediate Series received by Adjustable Rate Fund in exchange for such
shareholders' interest in Adjustable Rate Fund evidenced by their shares of
common stock of Adjustable Rate Fund. Such liquidation and distribution will be
accomplished by opening accounts on the books of Intermediate Series in the
names of Adjustable Rate Fund shareholders and by transferring thereto the
shares of Intermediate Series previously credited to the account of Adjustable
Rate Fund on those books. Each shareholder account shall represent the
respective pro rata number of Intermediate Series shares due to such Adjustable
Rate Fund shareholder. Fractional shares of Intermediate Series will be rounded
to the third decimal place.
Accordingly, every participating shareholder of Adjustable Rate Fund will
own shares of Intermediate Series immediately after the reorganization that,
except for rounding, will be equal to the value of that shareholder's Class A or
Class B shares of Adjustable Rate Fund immediately prior to the reorganization.
Moreover, because shares of Intermediate Series will be issued at net asset
value in exchange for net assets of Adjustable Rate Fund that, except for
rounding, will equal the aggregate value of those shares, the net asset value
per share of Intermediate Series will be unchanged. Thus, the reorganization
will not result in a dilution of the value of any shareholder account. However,
in general, the reorganization will substantially reduce the percentage of
ownership of each Adjustable Rate Fund shareholder below such shareholder's
current percentage of ownership of Adjustable Rate Fund because, while such
shareholder will have the same dollar
15
<PAGE> 19
amount invested initially in Intermediate Series that he or she had invested in
Adjustable Rate Fund, his or her investment will represent a smaller percentage
of the combined net assets of Intermediate Series and Adjustable Rate Fund.
Any transfer taxes payable upon issuance of shares of Intermediate Series
in a name other than that of the registered holder of the shares on the books of
Adjustable Rate Fund as of that time shall be paid by the person to whom such
shares are to be issued as a condition of such transfer. Any reporting
responsibility of Adjustable Rate Fund will continue to be the responsibility of
Adjustable Rate Fund up to and including the Closing Date and such later date on
which Adjustable Rate Fund is liquidated.
Prior to the Closing Date, and in connection with the Special Meeting, it
is anticipated that the Trustees of the Intermediate Series will change the name
of such Fund to "Short-Intermediate Term Series."
The consummation of the proposed transaction is subject to a number of
conditions set forth in the Plan, some of which may be waived by the Board of
Directors/Trustees of the Funds. The Plan may be terminated and the proposed
transaction abandoned at any time, before or after approval by the shareholders
of Adjustable Rate Fund, prior to the Closing Date. In addition, the Plan may be
amended in any mutually agreeable manner, except that no amendment may be made
subsequent to the Meeting of shareholders of Adjustable Rate Fund that would
detrimentally affect the value of Intermediate Series shares to be distributed.
REASONS FOR THE REORGANIZATION AND LIQUIDATION
The Board of Directors of Adjustable Rate Fund, including a majority of the
Independent Directors, has determined that the interests of Adjustable Rate Fund
shareholders will not be diluted as a result of the proposed transaction and
that the proposed transaction is in the best interests of the shareholders of
Adjustable Rate Fund. In addition, the Trustees of Intermediate Series,
including a majority of the Independent Trustees, have determined that the
interests of Intermediate Series' shareholders will not be diluted as a result
of the proposed transaction and that the proposed transaction is in the best
interests of the shareholders of Intermediate Series.
The reasons for the proposed transaction are described above under
"Synopsis -- Reasons for the Proposed Reorganization and Liquidation." The
Directors/Trustees of the Funds based their decision to approve the Plan on an
inquiry into a number of factors, including the following:
(1) the relative past growth in assets and investment performance and
future prospects of the Funds;
(2) the effect of the proposed transaction on the expense ratios of each
Fund;
(3) the costs of the reorganization, which will be paid for by each Fund
in proportion to their respective asset levels;
(4) the tax-free nature of the reorganization to the Funds and their
shareholders;
(5) the potential benefits to PMF, PMFD and PSI. See "Synopsis -- Fees
and Expenses" above; and
(6) the compatibility of the investment objectives, policies and
restrictions of the Funds.
If the Plan is not approved by Adjustable Rate Fund shareholders, the
Adjustable Rate Fund Board of Directors may consider other appropriate action,
such as the liquidation of Adjustable Rate Fund or a merger or other business
combination with an investment company other than Intermediate Series.
16
<PAGE> 20
DESCRIPTION OF SECURITIES TO BE ISSUED
Intermediate Series shares represent shares of beneficial interest with
$.01 par value per share. Shares of Intermediate Series will be issued to
Adjustable Rate Fund shareholders on the Closing Date. Each share represents an
equal and proportionate interest in Intermediate Series. Intermediate Series'
authorized capital consists of an unlimited number of full and fractional shares
of beneficial interest. Shares entitle their holders to one vote per full share
and fractional votes for fractional shares held. Each share of Intermediate
Series has equal voting, dividend and liquidation rights with other shares.
TAX CONSIDERATIONS
Prior to the Closing, Adjustable Rate Fund will receive an opinion from
Shereff, Friedman, Hoffman & Goodman, LLP to the effect that (1) the proposed
transaction described above will constitute a reorganization within the meaning
of Section 368(a)(1)(C) of the Internal Revenue Code; (2) no gain or loss will
be recognized by shareholders of Adjustable Rate Fund upon their receipt of
shares, including fractional shares, of Intermediate Series in exchange for
their shares of Adjustable Rate Fund (Internal Revenue Code Section 354(a)(1));
(3) no gain or loss will be recognized by Adjustable Rate Fund upon the transfer
of its assets to Intermediate Series in exchange solely for shares of
Intermediate Series and the assumption by Intermediate Series of Adjustable Rate
Fund's liabilities, if any, and the subsequent distribution of those shares to
its shareholders in liquidation thereof (Internal Revenue Code Sections 361(a)
and 357(a)); (4) no gain or loss will be recognized by Intermediate Series upon
the receipt of such assets in exchange solely for Intermediate Series shares and
its assumption of Adjustable Rate Fund's liabilities, if any (Internal Revenue
Code Section 1032(a)); (5) Intermediate Series' basis for the assets received
pursuant to the reorganization will be the same as the basis thereof in the
hands of Adjustable Rate Fund immediately before the reorganization, and the
holding period of those assets in the hands of Intermediate Series will include
the holding period thereof in Adjustable Rate Fund hands (Internal Revenue Code
Sections 362(b) and 1223(2)); (6) Adjustable Rate Fund shareholders' basis for
the shares of Intermediate Series to be received by them pursuant to the
reorganization will be the same as their basis for the shares of Adjustable Rate
Fund to be surrendered in exchange therefor (Internal Revenue Code Section
358(a)(1)); and (7) the holding period of the shares of Intermediate Series to
be received by the shareholders of Adjustable Rate Fund pursuant to the
reorganization will include the period during which the shares of Adjustable
Rate Fund to be surrendered in exchange therefor were held, provided the latter
shares were held as capital assets by the shareholders on the date of the
exchange (Internal Revenue Code Section 1223(1)).
CERTAIN COMPARATIVE INFORMATION ABOUT THE FUNDS
ORGANIZATION. Adjustable Rate Fund is a Maryland corporation and the
rights of its shareholders are governed by its Articles of Incorporation,
By-Laws and the Maryland General Corporation Law. Intermediate Series is a
series of Prudential Government Securities Trust, a Massachusetts business
trust, and the rights of its shareholders are governed by Prudential Government
Securities Trust's Declaration of Trust, By-Laws and Massachusetts law.
CAPITALIZATION. Adjustable Rate Fund has issued shares of common stock,
par value $.001 per share. Its Articles of Incorporation authorize it to issue
2,000,000,000 shares to be divided initially into two classes, consisting of
1,000,000,000 shares of Class A common stock and 1,000,000,000 shares of Class B
common stock. Intermediate Series has issued shares of beneficial interest, par
value $.01 per share. The Declaration of Trust of Prudential Government
Securities Trust permits the Trustees to issue an unlimited number of full and
fractional shares in separate series.
17
<PAGE> 21
SHAREHOLDER MEETINGS AND VOTING RIGHTS. Generally, neither Fund is
required to hold annual meetings of its shareholders. Each Fund is required to
call a meeting of shareholders for the purpose of voting upon the question of
removal of a Director/Trustee when requested in writing to do so by the holders
of at least 10% of the Fund's outstanding shares. In addition, each Fund is
required to call a meeting of shareholders for the purpose of electing
Directors/Trustees if, at any time, less than a majority of the
Directors/Trustees holding office were elected by shareholders.
Shareholders of each Fund are entitled to one vote for each share on all
matters submitted to a vote of its shareholders under Maryland or Massachusetts
law, as the case may be. Approval of certain matters, such as an amendment to
the charter, a merger, consolidation or transfer of all or substantially all
assets, dissolution and removal of a director, requires the affirmative vote of
a majority of the votes entitled to be cast. Other matters require the approval
of the affirmative vote of a majority of the votes cast at a meeting at which a
quorum is present.
Each Fund's By-Laws provide that a majority of the outstanding shares shall
constitute a quorum for the transaction of business at a shareholders' meeting.
Matters requiring a larger vote by law or under the organizational documents for
each Fund are not affected by such quorum requirements.
SHAREHOLDER LIABILITY. Under Maryland law, shareholders of Adjustable Rate
Fund have no personal liability as such for Adjustable Rate Fund's acts or
obligations. Under Massachusetts law, however, shareholders of a Massachusetts
business trust could, under certain circumstances, be held personally liable for
its obligations. The Declaration of Trust relating to Intermediate Series,
however, contains an express disclaimer of liability for the acts, obligations
or affairs of Intermediate Series. The Declaration of Trust also provides for
indemnification and reimbursement of claims, liabilities and expenses incurred
by a shareholder of the Intermediate Series by reason of his having been a
shareholder.
LIABILITY AND INDEMNIFICATION OF DIRECTORS/TRUSTEES. Under Adjustable Rate
Fund's Articles of Incorporation and Maryland law, a director or officer of the
Fund is not liable to the Fund or its shareholders for monetary damages for
breach of fiduciary duty as a director or officer except to the extent such
exemption from liability or limitation thereof is not permitted by law,
including the Investment Company Act. Under the Declaration of Trust, no Trustee
or officer of the Prudential Government Securities Trust shall be liable to the
Prudential Government Securities Trust or its shareholders for any action or
failure to act except for his own bad faith, wilful misfeasance, gross
negligence or reckless disregard of his duties.
Under the Investment Company Act, a Director/Trustee may not be protected
against liability to the Fund and its security holders to which he would
otherwise be subject as a result of his willful misfeasance, bad faith or gross
negligence in the performance of his duties, or by reason of reckless disregard
of his obligations and duties. The staff of the SEC interprets the Investment
Company Act to require additional limits on indemnification of
directors/trustees and officers.
18
<PAGE> 22
PRO FORMA CAPITALIZATION AND RATIOS
The following table shows the capitalization of each Fund as of April 30,
1995 and the pro forma combined capitalization of both Funds as if the
reorganization had occurred on that date.
<TABLE>
<CAPTION>
PRO
ADJUSTABLE RATE INTERMEDIATE FORMA
FUND SERIES COMBINED
----------------- -------- --------
<S> <C> <C> <C> <C>
CLASS
CLASS A B
Net Assets (000)..................... $55,731 $ 263 $213,517 $268,511
Net Asset Value per share............ $ 9.62 $9.65 $ 9.44 $ 9.44
Shares Outstanding (000)............. 5,794 27 22,518 28,450
</TABLE>
The following table shows the ratio of expenses to average net assets and
the ratio of net investment income to average net assets of Adjustable Rate Fund
for the fiscal year ended February 28, 1995 and of Intermediate Series for the
fiscal year ended November 30, 1994. The ratios are also shown on a pro forma
combined basis, assuming the reorganization occurs on or about August 24, 1995.
<TABLE>
<CAPTION>
PRO
ADJUSTABLE RATE INTERMEDIATE FORMA
FUND SERIES COMBINED
--------------- ----- -----
<S> <C> <C> <C> <C>
CLASS CLASS
A B
Ratio of expenses to average net
assets............................ 1.07% 1.03% .84% .90%
Ratio of net investment income to
average net assets................ 3.65% 3.47% 5.48% 4.63%
</TABLE>
19
<PAGE> 23
INFORMATION ABOUT INTERMEDIATE SERIES
FINANCIAL INFORMATION
For condensed financial information for Intermediate Series, see "Financial
Highlights" in the Intermediate Series Prospectus.
GENERAL
For a discussion of the organization, classification and sub-classification
of Intermediate Series, see "General Information" and "Trust Highlights" in the
Intermediate Series Prospectus.
INVESTMENT OBJECTIVE AND POLICIES
For a discussion of Intermediate Series' investment objective and policies
and risk factors associated with an investment in Intermediate Series, see "How
the Trust Invests" in the Intermediate Series Prospectus.
TRUSTEES
For a discussion of the responsibilities of Intermediate Series' Trustees,
see "How the Trust is Managed" in the Intermediate Series Prospectus.
MANAGER AND PORTFOLIO MANAGER
For a discussion of Intermediate Series' Manager, subadviser and portfolio
manager, see "How the Trust is Managed -- Manager" in the Intermediate Series
Prospectus.
PERFORMANCE
For a discussion of Intermediate Series' performance during the fiscal year
ended November 30, 1994, see Appendix A hereto.
INTERMEDIATE SERIES' SHARES
For a discussion of Intermediate Series' shares, including voting rights
and exchange rights, and how the shares may be purchased and redeemed, see
"Shareholder Guide" and "How the Trust is Managed" in the Intermediate Series
Prospectus.
NET ASSET VALUE
For a discussion of how the offering price of Intermediate Series shares is
determined, see "How the Trust Values its Shares" in the Intermediate Series
Prospectus.
TAXES, DIVIDENDS AND DISTRIBUTIONS
For a discussion of Intermediate Series' policy with respect to dividends
and distributions and the tax consequences of an investment in Intermediate
Series shares, see "Taxes, Dividends and Distributions" in the Intermediate
Series Prospectus.
20
<PAGE> 24
ADDITIONAL INFORMATION
Intermediate Series is subject to the informational requirements of the
Investment Company Act and in accordance therewith files reports and other
information with the Securities and Exchange Commission. Proxy material, reports
and other information filed by Intermediate Series can be inspected and copied
at the public reference facilities maintained by the SEC at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549 and at the SEC's regional offices in New
York (7 World Trade Center, Suite 1300, New York, New York 10048) and Chicago
(Citicorp Center, Suite 1400, 500 West Madison Street, Chicago, Illinois
60661-2511). Copies of such material can be obtained at prescribed rates from
the Public Reference Branch, Office of Consumer Affairs and Information
Services, Securities and Exchange Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549.
INFORMATION ABOUT ADJUSTABLE RATE FUND
FINANCIAL INFORMATION
For condensed financial information for Adjustable Rate Fund, see
"Financial Highlights" in the Adjustable Rate Fund Prospectus.
GENERAL
For a discussion of the organization, classification and sub-classification
of Adjustable Rate Fund, see "General Information" and "Fund Highlights" in the
Adjustable Rate Fund Prospectus.
INVESTMENT OBJECTIVE AND POLICIES
For a discussion of Adjustable Rate Fund's investment objective and
policies, see "How the Fund Invests" in the Adjustable Rate Fund Prospectus.
DIRECTORS
For a discussion of the responsibilities of Adjustable Rate Fund's Board of
Directors, see "How the Fund is Managed" in the Adjustable Rate Fund Prospectus.
MANAGER AND PORTFOLIO MANAGER
For a discussion of Adjustable Rate Fund's Manager, subadviser and
portfolio manager, see "How the Fund is Managed -- Manager" in the Adjustable
Rate Fund Prospectus.
PERFORMANCE
For a discussion of Adjustable Rate Fund's performance during the fiscal
year ended February 28, 1995, see the Adjustable Rate Fund Annual Report to
Shareholders for the fiscal year ended February 28, 1995, which accompanies this
Prospectus and Proxy Statement.
ADJUSTABLE RATE FUND'S SHARES
For a discussion of Adjustable Rate Fund's Class A and Class B shares,
including voting rights, exchange rights and the conversion feature of Class B
shares, and how the shares may be purchased and redeemed, see "Shareholder
Guide" and "How the Fund is Managed" in the Adjustable Rate Fund Prospectus.
21
<PAGE> 25
NET ASSET VALUE
For a discussion of how the offering price of Adjustable Rate Fund's Class
A and Class B shares is determined, see "How the Fund Values its Shares" in the
Adjustable Rate Fund Prospectus.
TAXES, DIVIDENDS AND DISTRIBUTIONS
For a discussion of Adjustable Rate Fund's policy with respect to dividends
and distributions and the tax consequences of an investment in Class A or Class
B shares, see "Taxes, Dividends and Distributions" in the Adjustable Rate Fund
Prospectus.
ADDITIONAL INFORMATION
Additional information concerning Adjustable Rate Fund is incorporated
herein by reference from Adjustable Rate Fund's current Prospectus dated June
, 1995, and Adjustable Rate Fund's Annual Report to Shareholders for the
fiscal year ended February 28, 1995. Copies of Adjustable Rate Fund's Prospectus
and Annual Report are available without charge upon oral or written request from
Adjustable Rate Fund. To obtain Adjustable Rate Fund's Prospectus and Annual
Report, call (800) 225-1852 or write to Prudential Mutual Fund Services, Inc.,
Raritan Plaza One, Edison, New Jersey 08837.
Reports and other information filed by Adjustable Rate Fund can be
inspected and copied at the public reference facilities maintained by the
Securities and Exchange Commission at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549 and at the SEC's regional offices in New York (7 World
Trade Center, Suite 1300, New York, New York 10048) and Chicago (Citicorp
Center, Suite 1400, 500 West Madison Street, Chicago, Illinois 60661-2511).
Copies of such material can also be obtained at prescribed rates from the Public
Reference Branch, Office of Consumer Affairs and Information Services,
Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, D.C.
20549.
VOTING INFORMATION
If the accompanying form of Proxy is executed properly and returned, shares
represented by it will be voted at the Meeting in accordance with the
instructions on the Proxy. However, if no instructions are specified, shares
will be voted for the proposal. A Proxy may be revoked at any time prior to the
time it is voted by written notice to the Secretary of Adjustable Rate Fund or
by attendance at the Meeting. If sufficient votes to approve the proposal are
not received, the persons named as proxies may propose one or more adjournments
of the Meeting to permit further solicitation of Proxies. Any such adjournment
will require the affirmative vote of a majority of those shares present at the
Meeting or represented by proxy. When voting on a proposed adjournment, the
persons named as proxies will vote for the proposed adjournment all shares that
they are entitled to vote, unless directed to disapprove the proposal, in which
case such shares will be voted against the proposed adjournment. Any questions
as to an adjournment of the Meeting will be voted on by the persons named in the
enclosed Proxy in the same manner that the Proxies are instructed to be voted.
In the event that the Meeting is adjourned, the same procedures will apply at a
later Meeting date.
If a Proxy that is properly executed and returned, accompanied by
instructions to withhold authority to vote, represents a broker "non-vote" (that
is, a Proxy from a broker or nominee indicating that such person has not
received instructions from the beneficial owner or other person entitled to vote
shares on a particular matter with respect to which the broker or nominee does
not have discretionary power), the shares represented thereby will be considered
not to be present at the Meeting for purposes of determining the existence of a
quorum for the transaction of business and be deemed not cast with respect to
such proposal. If no instructions
22
<PAGE> 26
are received by the broker or nominee from the shareholder with reference to
routine matters, the shares represented thereby may be considered for purposes
of determining the existence of a quorum for the transaction of business and
will be deemed cast with respect to such proposal. Also, a properly executed and
returned Proxy marked with an abstention will be considered present at the
Meeting for purposes of determining the existence of a quorum for the
transaction of business. However, abstentions and broker "non-votes" do not
constitute a vote "for" or "against" the matter, but have the effect of a
negative vote on matters which require approval by a requisite percentage of the
outstanding shares.
The close of business on May 26, 1995 has been fixed as the record date for
the determination of shareholders entitled to notice of, and to vote at, the
Meeting. On that date, Adjustable Rate Fund had 5,734,321.048 Class A shares and
21,248.955 Class B shares outstanding and entitled to vote.
Each share of Adjustable Rate Fund will be entitled to one vote at the
Meeting. It is expected that the Notice of Special Meeting, Prospectus and Proxy
Statement and form of Proxy will be mailed to shareholders on or about June 30,
1995.
As of May 26, 1995, the following shareholders owned beneficially or of
record 5% or more of Adjustable Rate Fund's outstanding Class A or Class B
shares:
As of May 26, 1995, Paul G. Allen, 110 110th Ave., NE, Suite 550, Bellevue,
Washington was the beneficial owner of 2,129,624 Class A shares (approximately
37% of the outstanding Class A shares). As of May 26, 1995, Sammy L. Clement,
2740 Kuilei Street -- Apt. 1806, Honolulu, Hawaii was the beneficial owner of
1,068 Class B shares (approximately 5% of the outstanding Class B shares), James
Woodson, Rose Boyd Co -- TTEES, Gloria Glywasky Fmly Mgt Trust UA DTD 08/17/94,
FBO Gloria Glywasky, 23 Pendale Drive, Amityville, New York was the beneficial
owner of 3,157 Class B shares (approximately 15% of the outstanding Class B
shares), Prudential Bank & Trust Co. C/F The Rollover IRA of S. Stanley Steen,
Rd. 1, Box 229, Lincoln, Delaware was the beneficial owner of 2,356 Class B
shares (approximately 11% of the outstanding Class B shares), Prudential Bank &
Trust Co. C/F The IRA of Ralph E. Butler, Sr., Rd. 1, Box 988, Harrington,
Delaware was the beneficial owner of 1,605 Class B shares (approximately 8% of
the outstanding Class B shares), Romesh Wadltwant TTEE Aspect Development 401K
DTD 01/01/92 FBO 401K Svgs and Retrm, 1240 Villa Street, Mountain View,
California was the beneficial owner of 2,237 Class B shares (approximately 11%
of the outstanding Class B shares), Prudential Securities C/F Betty Jennings IRA
DTD 06/20/88, 17044 Louis Court, South Holland, Illinois was the beneficial
owner of 1,318 Class B shares (approximately 6% of the outstanding Class B
shares) and Dennis B. Markgraf, Connie D. Markgraf Co -- TTEES The Marvin H. and
Cecil G. Markgraf Living Trust UA DTD 04/11/92, 103 Pleasant Street, Granite
Falls, Minnesota was the beneficial owner of 1,735 Class B shares (approximately
8% of the outstanding Class B shares).
The expenses of reorganization and solicitation will be borne by Adjustable
Rate Fund and Intermediate Series in proportion to their respective assets and
will include reimbursement of brokerage firms and others for expenses in
forwarding proxy solicitation material to shareholders. The Board of Directors
of Adjustable Rate Fund has retained Shareholder Communications Corporation, a
proxy solicitation firm, to assist in the solicitation of proxies for the
Meeting. The fees and expenses of Shareholder Communications Corporation are not
expected to exceed $2,000, excluding mailing and printing costs. The
solicitation of Proxies will be largely by mail but may include telephonic,
telegraphic or oral communication by regular employees of Prudential Securities
and its affiliates, including Prudential Mutual Fund Management, Inc. This cost,
including specified expenses, also will be borne by Adjustable Rate Fund and
Intermediate Series in proportion to their respective assets.
23
<PAGE> 27
OTHER MATTERS
No business other than as set forth herein is expected to come before the
Meeting, but should any other matter requiring a vote of shareholders of
Adjustable Rate Fund arise, including any question as to an adjournment of the
Meeting, the persons named in the enclosed Proxy will vote thereon according to
their best judgment in the interests of Adjustable Rate Fund, taking into
account all relevant circumstances.
SHAREHOLDERS' PROPOSALS
An Adjustable Rate Fund shareholder proposal intended to be presented at
any subsequent meeting of the shareholders of Adjustable Rate Fund must be
received by Adjustable Rate Fund a reasonable time before the Directors'
solicitation relating to such meeting is made in order to be included in
Adjustable Rate Fund's Proxy Statement and form of Proxy relating to that
meeting. In the event that the Plan is approved at this Meeting, it is not
expected that there will be any future shareholder meetings of Adjustable Rate
Fund.
It is the present intent of the Board of Directors of Adjustable Rate Fund
and of the Trustees of the Intermediate Series not to hold annual meetings of
shareholders unless the election of Directors/Trustees is required under the
Investment Company Act.
S. JANE ROSE,
Secretary
Dated: June , 1995
24
<PAGE> 28
APPENDIX A
PERFORMANCE OVERVIEW
LETTER TO
SHAREHOLDERS
January 16, 1995
Dear Shareholder:
Interest rates have risen dramatically over the last six months and money
market fund investors have seen their yields rise. Longer-term interest rates
have also risen, but bond prices fall as interest rates rise, so the average
intermediate-term bond fund produced negative total returns, as measured by
Lipper Analytical Services Inc. We're pleased to note that the all three Series
in the Government Securities Trust produced average returns in this market.
THE FED RAISED SHORT-TERM INTEREST RATES.
Over the last six months, the Federal Reserve Board has raised short-term
interest rates by 2.5 percentage points, in the belief that higher short-term
interest rates were necessary to moderate economic growth and keep inflation in
check. Third-quarter 1994 gross domestic product, which measures the value of
all goods produced and services delivered in the U.S., grew at an annualized
rate of 3.9%, faster than expected, and more than the 2.5% to 3% than the
Federal Reserve would like. Pessimists have argued that inflation must surely
follow even though inflation to date is within the Fed's target when measured
on an actual basis. So it continues to be the fear of rising inflation that
has spooked the markets--the prospect, but not the reality of increasing prices.
As the Federal Reserve raised short-term interest rates, inflation fears in
the bond market pushed rates on intermediate maturities higher as well. Yields
on shorter maturities rose more than yields on long maturities over the last six
months. The yield of the two-year U.S. Treasury rose to 7.3% on November 30,
from 6.0% on May 31, while the 10-year yield edged up to 7.8% from 7.2%.
[GRAPH]
A-1
<PAGE> 29
Money Market Series
The Money Market Series seeks high current income, preservation of capital
and maintenance of liquidity from a portfolio of money market instruments issued
by the U.S. Government, its agencies and instrumentalities.
MONEY MARKET SERIES PERFORMANCE
As of November 30, 1994
<TABLE>
<CAPTION>
7-Day Weighted Net Asset Total
Yield* Avg. Mat. (WAM) Value (NAV) Net Assets
<S> <C> <C> <C> <C>
Money Market Series 4.69% 42 days $1.00 $ 637.3 mil.
Donoghue's Money 4.67% 38 days $1.00 N/A
Fund Average (GVT)**
</TABLE>
*Yields will fluctuate from time to time and past performance is not
indicative of future results.
**This is the average 7-day yield, WAM and NAV of 212 funds in Donoghue's
Money Fund Average/U.S. Government Category for the week ending November 29.
An investment in the Series is neither insured nor guaranteed by the U.S.
Government and there can be no assurance that it will be able to maintain a
stable net asset value of $1.00 per share.
Money Market Yields Top 4%.
For the first time in two and half years, the Money Market Series' 7-day
yield has topped 4%. When we last reported to you on May 31, the Series' 7-day
yield was 3.18%. Our current 7-day yield of 4.69% is slightly higher than
Donoghue's U.S. Government Money Market average of 4.67%.
In this period of rising rates, the Series has shortened its weighted average
maturity (WAM) significantly from our position a year ago so we can reinvest
the proceeds from maturing notes more quickly at higher rates. In addition,
we increased our holdings in floating and variable rate instruments. The
coupons on these securities adjust periodically to reflect current interest
rates, so they help enhance yield when rates rise.
The floating rate notes we purchase are based on a money market index such
as LIBOR (London Interbank Offered Rate), the 3-month U.S. Treasury bill, or
the federal funds rate. These securities pay the quoted index rate plus a
specified margin, and the rate resets at a specified time period, such as
daily, weekly or monthly.
The Series held its WAM fairly steady, ending at 42 days on November 30,
compared to 39 days on May 31 and 64 days on November 30, 1993. In addition, we
increased our holdings in floating and variable rate instruments to 25% of
assets from 21% on May 31.
A-2
<PAGE> 30
U.S. Treasury Money Market Series
The U.S. Treasury Money Market Series seeks high current income consistent
with preservation of capital and maintenance of liquidity from a portfolio of
U.S. Treasury obligations with maturities of 13 months or less. During the
last six months, the U.S. Treasury Money Market Series produced yields
competitive with the Donoghue Government Money Fund Averages.
U.S. TREASURY MONEY MARKET SERIES PERFORMANCE
As of November 30, 1994
<TABLE>
<CAPTION>
7-Day Weighted Net Asset Total
Yield* Avg. Mat. (WAM) Value (NAV) Net Assets
<S> <C> <C> <C> <C>
U.S. Treasury Series 4.64% 45 days $1.00 $294.0 mil.
Donoghue's Money 4.50% 46 days $1.00 N/A
Fund Averages (TR)**
</TABLE>
* Yields will fluctuate from time to time and past performance is not
indicative of future results.
**This is the average 7-day yield, WAM and NAV of 37 funds in Donoghue's
100% U.S. Treasury Money Fund Average.
An investment in the Series is neither insured nor guaranteed by the U.S.
government and there can be no assurance that it will be able to maintain a
stable net asset value of $1.00 per share.
Managing Maturity As Interest Rates Rise.
When we last reported to you, our 7-day yield was 3.20%. On November 30,
the 7-day yield was 4.64%, outperforming Donoghue's 100% U.S. Treasury Money
Fund Average of 4.50%.
At the beginning of our reporting period, on May 31, we held a 51-day WAM,
slightly longer than our peers. At the time, we wanted to lock in interest rates
that the Federal Reserve had increased on May 17. Since then, we have shortened
WAM to 45 days, so we could reinvest the proceeds from maturing notes more
quickly at higher rates.
Tax Update-Intermediate Term Series
Of the 4.5 cents declared as accumulated net investment income in December
1994, 4 cents was derived from net investment income and 0.5 cents was derived
from paid-in capital. In addition, we believe approximately 17% of the
distributions paid in 1994 will constitute a ``return of capital,'' which is
not subject to taxation as ordinary income.
Intermediate-Term Series
The Intermediate-Term Series seeks high income consistent with providing
reasonable safety of principal by investing primarily in a diversified portfolio
of securities issued by the U.S. government, its agencies or instrumentalities.
The Series' net asset value (NAV) fell to $9.17 on November 30 from $9.47 on
May 31. At the same time, the Series' 30-day SEC yield rose above 6% for the
first time since September, 1991. On May 31, the Series' 30-day SEC yield was
4.79%. On November 30, the yield was 6.52%.
A-3
<PAGE> 31
INTERMEDIATE-TERM SERIES
CUMULATIVE TOTAL RETURN
As of November 30, 1994*
<TABLE>
<CAPTION>
One Year Five Year Ten Year Since 9/22/82
<S> <C> <C> <C> <C>
Intermediate -2.6% 35.6% 120.3% 173.0%
Term Series
Lipper Inter. -3.7% 37.0% 122.5% 168.1%
US Gvt Bond
Fund Average**
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
As of December 31, 1994*
One Year Five Year Ten Year Since 9/22/82
<S> <C> <C> <C> <C>
Intermediate -2.4% 6.4% 8.1% 8.6%
Term Series
</TABLE>
Past performance is no guarantee of future results. Investment return and
principal will fluctuate so that an investor's shares, when redeemed, may be
worth more or less than their original cost.
* Source: Prudential Mutual Fund Management Inc. Shares of this Series are
sold without an initial or contingent deferred sales charge.
**These are the average returns of 88 funds in the Intermediate U.S.
Government Bond Fund category for six months, 73 funds for one year, 20 funds
for five years, 5 funds for 10 years, and 3 funds since inception on 9/22/82,
as determined by Lipper Analytical Services, Inc.
More Mortgages.
To counter the negative effect of rising interest rates on bond prices, we
adopted a defensive posture by increasing exposure to mortgage-backed securities
to 30% of assets from 12%. Mortgages tend to be less volatile than U.S.
Treasurys as interest rates rise, because they generally have higher coupons.
In addition, the risk these will be prepaid declines since homeowners have no
incentive to prepay their mortgages. (Prepayment risk is important because a
security is less valuable if it matures earlier than anticipated.) Following
this strategy, we sold approximately $50 million in U.S. Treasury notes with
maturities ranging from five to ten years and reinvested the proceeds in Ginnie
Mae adjustable rate mortgages and seven-year Fannie Mae balloon mortgages.
As a result of increasing our holdings in mortgages, turnover in the
portfolio increased this year. When David Graham started to manage the fund in
November 1993, he began to add mortgage-backed securities to the portfolio.
Until then, the portfolio contained primarily U.S. Treasurys and government
agencies. During the 12-month period, David invested as much as 30% of assets
in U.S. mortgage-backed securities to increase the series' yield and enhance
value during a turbulent interest rate environment. Mortgages outperformed
both Treasurys and agencies during the period, as measured by Lehman Brothers.
A-4
<PAGE> 32
We also shifted assets to shorter-term maturities to take advantage of
rapidly rising interest rates in this maturity range. For example, the
percentage of assets in the one -- to three-year maturity range rose to 50%
from 32% while assets held in the three -- to five-year maturity range fell to
15% from 45%.
The Outlook.
The economy probably has not yet slowed sufficiently to prevent the threat
of rising inflation. We expect the Federal Reserve to increase short-term
interest rates at least one more time before its job is done, and will continue
to manage our portfolios to maximize yield and preserve value to the degree
dictated by each of the individual Series' objectives.
Thank you for the confidence you have shown in us by choosing the Prudential
Government Securities Trust for your government securities investment.
Sincerely,
Lawrence C. McQuade
President
Bernard D. Whitsett II
Portfolio Manager
Money Market Series
U.S. Treasury Money Market Series
David Graham
Portfolio
Manager
Intermediate-Term Series
A-5
<PAGE> 33
PRUDENTIAL GOVERNMENT SECURITIES TRUST: INTERMEDIATE TERM SERIES
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN PRUDENTIAL GOVERNMENT
SECURITIES TRUST: INTERMEDIATE TERM SERIES AND THE LEHMAN INTERMEDIATE
GOVERNMENT BOND INDEX
[FUND LBGI CHART]
Past performance is not predictive of future performance and an
investor's shares may be worth more or less than their original cost.
This graph is furnished to you in accordance with SEC regulations. It
compares a $10,000 investment in Prudential Government Securities Trust:
Intermediate Term Series with a similar investment in the Lehman Brothers
Intermediate Government Bond Index (LBGI) by portraying the initial account
value on December 1, 1984 and subsequent account values at the end of each
fiscal year (November 30), as measured on a quarterly basis. For purposes of
the graph and, unless otherwise indicated, the accompanying table, it has been
assumed that all recurring fees (including management fees) were deducted and
all dividends and distributions were reinvested.
The LBGI is a weighted index comprised of securities issued or backed
by the U.S. government, its agencies and instrumentalities with a remaining
maturity of one to ten years. The LBGI is an unmanaged Index and includes the
reinvestment of all dividends, but does not reflect the payment of transaction
costs and advisory fees associated with an investment in the Fund. The
securities that comprise the LBGI may differ substantially from the securities
in the Fund's portfolio. The LBGI is not the only index that may be used to
characterize performance of intermediate-term bond funds and other indices may
portray different comparative performance.
A-6
<PAGE> 34
APPENDIX B
FORM OF
AGREEMENT AND PLAN OF REORGANIZATION AND LIQUIDATION
Agreement and Plan of Reorganization and Liquidation (Agreement) made as of
the th day of , 1995, by and between Prudential Adjustable Rate
Securities Fund, Inc. (Adjustable Rate Fund) and Prudential Government
Securities Trust (Government Securities Trust) (collectively, the Funds and each
individually, a Fund). Adjustable Rate Fund is a corporation organized under the
laws of the State of Maryland and maintains its principal place of business at
One Seaport Plaza, New York, New York 10292. Government Securities Trust is a
Massachusetts business trust and maintains its principal place of business at
One Seaport Plaza, New York, New York 10292. Shares of Adjustable Rate Fund are
divided into two classes, designated Class A and Class B. Government Securities
Trust consists of three portfolios, the Intermediate Term Series (Intermediate
Series) being the portfolio into which the assets of Adjustable Rate Fund are
proposed to be transferred.
This Agreement is intended to be, and is adopted as, a plan of
reorganization pursuant to Section 368(a)(1)(C) of the Internal Revenue Code of
1986, as amended (Internal Revenue Code). The reorganization will comprise the
transfer of all of the assets of Adjustable Rate Fund, in exchange solely for
shares of beneficial interest of the Intermediate Series and Intermediate
Series' assumption of Adjustable Rate Fund's liabilities, if any, and the
constructive distribution, after the Closing Date hereinafter referred to, of
such shares of the Intermediate Series to the shareholders of Adjustable Rate
Fund in liquidation of Adjustable Rate Fund as provided herein, all upon the
terms and conditions as hereinafter set forth.
In consideration of the premises and of the covenants and agreements set
forth herein, the parties covenant and agree as follows:
1. Transfer of Assets of Adjustable Rate Fund in Exchange for Shares of the
Intermediate Series and Assumption of Liabilities, if any, and Liquidation of
Adjustable Rate Fund.
1.1 Subject to the terms and conditions herein set forth and on the
basis of the representations and warranties contained herein, Adjustable
Rate Fund agrees to sell, assign, transfer and deliver its assets, as set
forth in paragraph 1.2, to Intermediate Series, and Government Securities
Trust, on behalf of Intermediate Series, agrees (a) to issue and deliver to
Adjustable Rate Fund in exchange thereof the number of shares in
Intermediate Series determined by dividing the net asset value of
Adjustable Rate Fund allocable to shares of Class A and Class B Common
Stock (computed in the manner and as of the time and date set forth in
paragraph 2.2) by the net asset value allocable to a share of the
Intermediate Series (computed in the manner and as of the time and date set
forth in paragraph 2.2); and (b) to assume all of Adjustable Rate Fund's
liabilities, if any, as set forth in paragraph 1.3. Such transactions shall
take place at the closing provided for in paragraph 3 (Closing).
1.2 The assets of Adjustable Rate Fund to be acquired by Intermediate
Series shall include without limitation all cash, cash equivalents,
securities, receivables (including interest and dividends receivable) and
other property of any kind owned by Adjustable Rate Fund and any deferred
or prepaid expenses shown as assets on the books of Adjustable Rate Fund on
the closing date provided in paragraph 3 (Closing Date). Government
Securities Trust has no plan or intent to sell or otherwise dispose of any
assets of Adjustable Rate Fund.
1.3 Except as otherwise provided herein, Intermediate Series will
assume from Adjustable Rate Fund all debts, liabilities, obligations and
duties of Adjustable Rate Fund of whatever kind or nature,
B-1
<PAGE> 35
whether absolute, accrued, contingent or otherwise, whether or not
determinable as of the Closing Date and whether or not specifically
referred to in this Agreement; provided, however, that Adjustable Rate Fund
agrees to utilize its best efforts to discharge all of its known debts,
liabilities, obligations and duties prior to the Closing Date.
1.4 On or immediately prior to the Closing Date, Adjustable Rate Fund
will declare and pay to its shareholders of record dividends and/or other
distributions so that it will have distributed substantially all (and in
any event not less than ninety-eight percent) of its investment company
taxable income (computed without regard to any deduction for dividends
paid), net tax-exempt interest income, if any, and realized net capital
gains, if any, for all taxable years through its liquidation.
1.5 On a date (Liquidation Date), as soon after the Closing Date as is
conveniently practicable, Adjustable Rate Fund will file Articles of
Dissolution with the State Department of Assessment and Taxation of the
State of Maryland and distribute pro rata to its Class A and Class B
shareholders of record, determined as of the close of business on the
Closing Date, the shares of Intermediate Series, respectively, received by
Adjustable Rate Fund pursuant to paragraph 1.1 in exchange for their
interest in Adjustable Rate Fund. Such distribution will be accomplished by
opening accounts on the books of the Intermediate Series in the names of
Adjustable Rate Fund shareholders and transferring thereto the shares
credited to the account of Adjustable Rate Fund on the books of
Intermediate Series. Each account opened shall be credited with the
respective pro rata number of Intermediate Series due each Adjustable Rate
Class A and Class B shareholder, respectively. Fractional shares of
Intermediate Series shall be rounded to the third decimal place.
1.6 The Intermediate Series shall not issue certificates representing
its shares in connection with such exchange. With respect to any Adjustable
Rate Fund shareholder holding Adjustable Rate Fund stock certificates as of
the Closing Date, until Intermediate Series is notified by Adjustable Rate
Fund's transfer agent that such shareholder has surrendered his or her
outstanding Adjustable Rate Fund stock certificates or, in the event of
lost, stolen or destroyed stock certificates, posted adequate bond or
submitted a lost certificate form, as the case may be, Intermediate Series
will not permit such shareholder to (1) receive dividends or other
distributions on Intermediate Series shares in cash (although such
dividends and distributions shall be credited to the account of such
shareholder established on Intermediate Series' books pursuant to paragraph
1.5, as provided in the next sentence), (2) exchange Intermediate Series
shares credited to such shareholder's account for shares of other
Prudential Mutual Funds, or (3) pledge or redeem such shares. In the event
that a shareholder is not permitted to receive dividends or other
distributions on Intermediate Series shares in cash as provided in the
preceding sentence, the Intermediate Series shall pay such dividends or
other distributions in additional Intermediate Series shares,
notwithstanding any election such shareholder shall have made previously
with respect to the payment of dividends or other distributions on shares
of Adjustable Rate Fund. Adjustable Rate Fund will, at its expense, request
its shareholders to surrender their outstanding Adjustable Rate Fund stock
certificates, post adequate bond or submit a lost certificate form, as the
case may be.
1.7 Ownership of the Intermediate Series shares will be shown on the
books of Government Securities Trust's transfer agent. Shares of
Intermediate Series will be issued in the manner described in Intermediate
Series' then-current prospectus and Government Securities Trust's
then-current statement of additional information.
1.8 Any transfer taxes payable upon issuance of shares of the
Intermediate Series in a name other than the registered holder of the
shares on the books of Adjustable Rate Fund as of that time shall be paid
by the person to whom such shares are to be issued as a condition to the
registration of such transfer.
B-2
<PAGE> 36
1.9 Any reporting responsibility with the Securities and Exchange
Commission or any state securities commission of Adjustable Rate Fund is
and shall remain the responsibility of Adjustable Rate Fund up to and
including the Liquidation Date.
1.10 All books and records of Adjustable Rate Fund, including all
books and records required to be maintained under the Investment Company
Act of 1940 (Investment Company Act) and the rules and regulations
thereunder, shall be available to Intermediate Series from and after the
Closing Date and shall be turned over to Government Securities Trust on or
prior to the Liquidation Date.
2. Valuation
2.1 The value of Adjustable Rate Fund's assets and liabilities to be
acquired and assumed, respectively, by Intermediate Series shall be the net
asset value computed as of 4:15 p.m., New York time, on the Closing Date
(such time and date being hereinafter called the Valuation Time), using the
valuation procedures set forth in Adjustable Rate Fund's then-current
prospectus and statement of additional information.
2.2 The net asset value of a share of the Intermediate Series shall be
the net asset value per such share computed as of the Valuation Time, using
the valuation procedures set forth in Intermediate Series' then-current
prospectus and Government Securities Trust's then-current statement of
additional information.
2.3 The number of Intermediate Series shares to be issued (including
fractional shares, if any) in exchange for Adjustable Rate Fund's net
assets shall be calculated as set forth in paragraph 1.1.
2.4 All computations of net asset value shall be made by or under the
direction of Prudential Mutual Fund Management, Inc. (PMF) in accordance
with its regular practice as manager of the Funds.
3. Closing and Closing Date
3.1 Except as provided in Section 3.3, the Closing Date shall be
August 24, 1995; or such later date as the parties may agree in writing.
All acts taking place at the Closing shall be deemed to take place
simultaneously as of the close of business on the Closing Date unless
otherwise provided. The Closing shall be at the office of Government
Securities Trust or at such other place as the parties may agree.
3.2 State Street Bank and Trust Company (State Street), as custodian
for Adjustable Rate Fund, shall deliver to Government Securities Trust at
the Closing a certificate of an authorized officer of State Street stating
that (a) Adjustable Rate Fund's portfolio securities, cash and any other
assets have been transferred in proper form to Government Securities Trust
on the Closing Date and (b) all necessary taxes, if any, have been paid, or
provision for payment has been made, in conjunction with the transfer of
portfolio securities.
3.3 In the event that immediately prior to the Valuation Time (a) the
New York Stock Exchange (NYSE) or other primary exchange is closed to
trading (other than prior to, or following the close of, trading on such
exchange on a regular business day) or trading thereon is restricted or (b)
trading or the reporting of trading on the NYSE or other primary exchange
or elsewhere is disrupted so that accurate appraisal of the value of the
net assets of Adjustable Rate Fund and of the net asset value per share of
Intermediate Series is impracticable, the Closing Date shall be postponed
until the first business day after the date when such trading shall have
been fully resumed and such reporting shall have been restored.
3.4 Adjustable Rate Fund shall deliver to Government Securities Trust
on or prior to the Liquidation Date the names and addresses of its
shareholders and the number of outstanding shares owned by each such
shareholder, all as of the close of business on the Closing Date, certified
by the
B-3
<PAGE> 37
Secretary or Assistant Secretary of Adjustable Rate Fund. Government
Securities Trust shall issue and deliver to Adjustable Rate Fund at the
Closing a confirmation or other evidence satisfactory to Adjustable Rate
Fund that shares of the Intermediate Series have been or will be credited
to Adjustable Rate Fund's account on the books of the Intermediate Series.
At the Closing each party shall deliver to the other such bills of sale,
checks, assignments, share certificates, receipts and other documents as
such other party or its counsel may reasonably request to effect the
transactions contemplated by this Agreement.
4. Representations and Warranties
4.1 Adjustable Rate Fund represents and warrants as follows:
4.1.1 Adjustable Rate Fund is a corporation duly organized and
validly existing under the laws of the State of Maryland;
4.1.2 Adjustable Rate Fund is an open-end management investment
company duly registered under the Investment Company Act, and such
registration is in full force and effect;
4.1.3 Adjustable Rate Fund is not, and the execution, delivery and
performance of this Agreement will not result, in violation of any
provision of the Articles of Incorporation or By-Laws of Adjustable Rate
Fund or of any material agreement, indenture, instrument, contract,
lease or other undertaking to which Adjustable Rate Fund is a party or
by which Adjustable Rate Fund is bound;
4.1.4 All material contracts or other commitments of Adjustable
Rate Fund except this Agreement will be terminated on or prior to the
Closing Date without Adjustable Rate Fund or Government Securities Trust
incurring any liability or penalty with respect thereto;
4.1.5 No material litigation or administrative proceeding or
investigation of or before any court or governmental body is presently
pending or to its knowledge threatened against Adjustable Rate Fund or
any of its properties or assets. Adjustable Rate Fund knows of no facts
that might form the basis for the institution of such proceedings, and
Adjustable Rate Fund is not a party to or subject to the provisions of
any order, decree or judgment of any court or governmental body that
materially and adversely affects its business or its ability to
consummate the transactions herein contemplated;
4.1.6 The Portfolio of Investments, Statement of Assets and
Liabilities, Statement of Operations, Statement of Changes in Net
Assets, and Financial Highlights of Adjustable Rate Fund at February 28,
1995 and for the year then ended (copies of which have been furnished to
Government Securities Trust) have been audited by Deloitte & Touche LLP,
independent accountants, in accordance with generally accepted auditing
standards. Such financial statements are prepared in accordance with
generally accepted accounting principles and present fairly, in all
material respects, the financial condition, results of operations,
changes in net assets and financial highlights of Adjustable Rate Fund
as of and for the period ended on such date, and there are no material
known liabilities of Adjustable Rate Fund (contingent or otherwise) not
disclosed therein;
4.1.7 Since February 28, 1995, there has not been any material
adverse change in Adjustable Rate Fund's financial condition, assets,
liabilities or business other than changes occurring in the ordinary
course of business, or any incurrence by Adjustable Rate Fund of
indebtedness maturing more than one year from the date such indebtedness
was incurred, except as otherwise disclosed to and accepted by
Government Securities Trust. For the purposes of this paragraph 4.1.7, a
decline in net asset value, net asset value per share or change in the
number of shares outstanding shall not constitute a material adverse
change;
B-4
<PAGE> 38
4.1.8 At the date hereof and at the Closing Date, all federal and
other tax returns and reports of Adjustable Rate Fund required by law to
have been filed on or before such dates shall have been timely filed,
and all federal and other taxes shown as due on said returns and reports
shall have been paid insofar as due, or provision shall have been made
for the payment thereof, and, to the best of Adjustable Rate Fund's
knowledge, all federal or other taxes required to be shown on any such
return or report have been shown on such return or report, no such
return is currently under audit and no assessment has been asserted with
respect to such returns;
4.1.9 For each past taxable year since it commenced operations,
Adjustable Rate Fund has met the requirements of Subchapter M of the
Internal Revenue Code for qualification and treatment as a regulated
investment company and intends to meet those requirements for the
current taxable year; and, for each past calendar year since it
commenced operations, Adjustable Rate Fund has made such distributions
as are necessary to avoid the imposition of federal excise tax or has
paid or provided for the payment of any excise tax imposed;
4.1.10 All issued and outstanding shares of Adjustable Rate Fund
are, and at the Closing Date will be, duly and validly authorized,
issued and outstanding, fully paid and non-assessable. All issued and
outstanding shares of Adjustable Rate Fund will, at the time of the
Closing, be held in the name of the persons and in the amounts set forth
in the list of shareholders submitted to Intermediate Series in
accordance with the provisions of paragraph 3.4. Adjustable Rate Fund
does not have outstanding any options, warrants or other rights to
subscribe for or purchase any of its shares, nor is there outstanding
any security convertible into any of its shares, except for the Class B
shares which have the conversion feature described in Adjustable Rate
Fund's current prospectus;
4.1.11 At the Closing Date, Adjustable Rate Fund will have good and
marketable title to its assets to be transferred to Intermediate Series
pursuant to paragraph 1.1, and full right, power and authority to sell,
assign, transfer and deliver such assets hereunder free of any liens,
claims, charges or other encumbrances, and, upon delivery and payment
for such assets, Intermediate Series will acquire good and marketable
title thereto;
4.1.12 The execution, delivery and performance of this Agreement
has been duly authorized by the Board of Directors of Adjustable Rate
Fund and by all necessary corporate action, other than shareholder
approval, on the part of Adjustable Rate Fund, and this Agreement
constitutes a valid and binding obligation of Adjustable Rate Fund,
subject to shareholder approval;
4.1.13 The information furnished and to be furnished by Adjustable
Rate Fund for use in applications for orders, registration statements,
proxy materials and other documents that may be necessary in connection
with the transactions contemplated hereby is and shall be accurate and
complete in all material respects and is in compliance and shall comply
in all material respects with applicable federal securities and other
laws and regulations; and
4.1.14 On the effective date of the registration statement filed
with the Securities and Exchange Commission (SEC) by Government
Securities Trust on Form N-14 relating to the shares of the Intermediate
Series issuable hereunder, and any supplement or amendment thereto
(Registration Statement), at the time of the meeting of the shareholders
of Adjustable Rate Fund and on the Closing Date, the Proxy Statement of
Adjustable Rate Fund, the Prospectus of the Intermediate Series and the
Statements of Additional Information of both Funds to be included in the
Registration Statement (collectively, Proxy Statement) (i) will comply
in all material respects with the provisions and regulations of the
Securities Act of 1933 (1933 Act), Securities Exchange Act of 1934 (1934
Act) and the Investment Company Act and the rules and regulations
thereunder and
B-5
<PAGE> 39
(ii) will not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein in light of the
circumstances under which they were made or necessary to make the
statements therein not misleading; provided, however, that the
representations and warranties in this paragraph 4.1.14 shall not apply
to statements in or omissions from the Proxy Statement and Registration
Statement made in reliance upon and in conformity with information
furnished by Government Securities Trust for use therein.
4.2 Government Securities Trust represents and warrants as follows:
4.2.1 Government Securities Trust is a business trust duly
organized and validly existing under the laws of the State of
Massachusetts; and the Intermediate Series has been duly established in
accordance with the terms of the Intermediate Series' Declaration of
Trust as a separate Series of Government Securities Trust;
4.2.2 Government Securities Trust is an open-end management
investment company duly registered under the Investment Company Act, and
such registration is in full force and effect;
4.2.3 Government Securities Trust is not, and the execution,
delivery and performance of this Agreement will not result, in violation
of any provision of its Declaration of Trust or By-Laws or of any
material agreement, indenture, instrument, contract, lease or other
undertaking to which Government Securities Trust is a party or by which
Government Securities Trust is bound;
4.2.4 No material litigation or administrative proceeding or
investigation of or before any court or governmental body is presently
pending or threatened against Government Securities Trust or any of its
properties or assets, except as previously disclosed in writing to
Adjustable Rate Fund. Government Securities Trust knows of no facts that
might form the basis for the institution of such proceedings, and
Government Securities Trust is not a party to or subject to the
provisions of any order, decree or judgment of any court or governmental
body that materially and adversely affects its business or its ability
to consummate the transactions herein contemplated;
4.2.5 The Portfolio of Investments, Statement of Assets and
Liabilities, Statement of Operations, Statement of Changes in Net
Assets, and Financial Highlights of the Intermediate Series at November
30, 1994 and for the fiscal year then ended (copies of which have been
furnished to Adjustable Rate Fund) have been audited by Price Waterhouse
LLP, independent accountants, in accordance with generally accepted
auditing standards. Such financial statements are prepared in accordance
with generally accepted accounting principles and present fairly, in all
material respects, the financial condition, results of operations,
changes in net assets and financial highlights of Intermediate Series as
of and for the period ended on such date, and there are no material
known liabilities of Intermediate Series (contingent or otherwise) not
disclosed therein;
4.2.6 Since November 30, 1994, there has not been any material
adverse change in the Intermediate Series financial condition, assets,
liabilities or business other than changes occurring in the ordinary
course of business, or any incurrence by Intermediate Series of
indebtedness maturing more than one year from the date such indebtedness
was incurred, except as otherwise disclosed to and accepted by
Adjustable Rate Fund. For the purposes of this paragraph 4.2.6, a
decline in net asset value per share or a decrease in the number of
shares outstanding shall not constitute a material adverse change;
4.2.7 At the date hereof and at the Closing Date, all federal and
other tax returns and reports of Government Securities Trust required by
law to have been filed on or before such dates shall have been filed,
and all federal and other taxes shown as due on said returns and reports
shall have been
B-6
<PAGE> 40
paid insofar as due, or provision shall have been made for the payment
thereof, and, to the best of Government Securities Trust's knowledge,
all federal or other taxes required to be shown on any such return or
report are shown on such return or report, no such return is currently
under audit and no assessment has been asserted with respect to such
returns;
4.2.8 For each past taxable year since it commenced operations, the
Intermediate Series has met the requirements of Subchapter M of the
Internal Revenue Code for qualification and treatment as a regulated
investment company and intends to meet those requirements for the
current taxable year; and, for each past calendar year since it
commenced operations, Intermediate Series has made such distributions as
are necessary to avoid the imposition of federal excise tax or has paid
or provided for the payment of any excise tax imposed;
4.2.9 All issued and outstanding shares of the Intermediate Series
are, and at the Closing Date will be, duly and validly authorized,
issued and outstanding, fully paid and non-assessable. Except as
contemplated by this Agreement, the Intermediate Series does not have
outstanding any options, warrants or other rights to subscribe for or
purchase any of its shares nor is there outstanding any security
convertible into any of its shares;
4.2.10 The execution, delivery and performance of this Agreement
has been duly authorized by the Trustees of Government Securities Trust
and by all necessary corporate action on the part of Government
Securities Trust, and this Agreement constitutes a valid and binding
obligation of Government Securities Trust;
4.2.11 The shares of Intermediate Series to be issued and delivered
to Adjustable Rate Fund pursuant to this Agreement will, at the Closing
Date, have been duly authorized and, when issued and delivered as
provided in this Agreement, will be duly and validly issued and
outstanding shares of Intermediate Series, fully paid and
non-assessable;
4.2.12 The information furnished and to be furnished by Government
Securities Trust for use in applications for orders, registration
statements, proxy materials and other documents which may be necessary
in connection with the transactions contemplated hereby is and shall be
accurate and complete in all material respects and is and shall comply
in all material respects with applicable federal securities and other
laws and regulations; and
4.2.13 On the effective date of the Registration Statement, at the
time of the meeting of the shareholders of Adjustable Rate Fund and on
the Closing Date, the Proxy Statement and the Registration Statement (i)
will comply in all material respects with the provisions of the 1933
Act, the 1934 Act and the Investment Company Act and the rules and
regulations under such Acts, (ii) will not contain any untrue statement
of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein not
misleading and (iii) with respect to the Registration Statement, at the
time it becomes effective, it will not contain an untrue statement of a
material fact or omit to state a material fact necessary to make the
statements therein in the light of the circumstances under which they
were made, not misleading; provided, however, that the representations
and warranties in this paragraph 4.2.13 shall not apply to statements in
or omissions from the Proxy Statement and the Registration Statement
made in reliance upon and in conformity with information furnished by
Adjustable Rate Fund for use therein.
5. Covenants of Government Securities Trust and Adjustable Rate Fund
5.1 Adjustable Rate Fund and Government Securities Trust each
covenants to operate its respective business in the ordinary course between
the date hereof and the Closing Date, it being understood that
B-7
<PAGE> 41
the ordinary course of business will include declaring and paying customary
dividends and other distributions and such changes in operations as are
contemplated by the normal operations of the Funds, except as may otherwise
be required by paragraph 1.4 hereof.
5.2 Adjustable Rate Fund covenants to call a shareholders' meeting to
consider and act upon this Agreement and to take all other action necessary
to obtain approval of the transactions contemplated hereby (including the
determinations of its Board of Directors as set forth in Rule 17a-8(a)
under the Investment Company Act).
5.3 Adjustable Rate Fund covenants that the Intermediate Series shares
to be received by Adjustable Rate Fund in accordance herewith are not being
acquired for the purpose of making any distribution thereof other than in
accordance with the terms of this Agreement.
5.4 Adjustable Rate Fund covenants that it will assist Government
Securities Trust in obtaining such information as Government Securities
Trust reasonably requests concerning the beneficial ownership of Adjustable
Rate Fund's shares.
5.5 Subject to the provisions of this Agreement, each Fund will take,
or cause to be taken, all action, and will do, or cause to be done, all
things, reasonably necessary, proper or advisable to consummate and make
effective the transactions contemplated by this Agreement.
5.6 Adjustable Rate Fund covenants to prepare the Proxy Statement in
compliance with the 1934 Act, the Investment Company Act and the rules and
regulations under each Act.
5.7 Adjustable Rate Fund covenants that it will, from time to time, as
and when requested by Government Securities Trust, execute and deliver or
cause to be executed and delivered all such assignments and other
instruments, and will take or cause to be taken such further action, as
Government Securities Trust may deem necessary or desirable in order to
vest in and confirm to Government Securities Trust title to and possession
of all the assets of Adjustable Rate Fund to be sold, assigned, transferred
and delivered hereunder and otherwise to carry out the intent and purpose
of this Agreement.
5.8 Government Securities Trust covenants to use all reasonable
efforts to obtain the approvals and authorizations required by the 1933
Act, the Investment Company Act (including the determinations of its
Trustees as set forth in Rule 17a-8(a) thereunder) and such of the state
Blue Sky or securities laws as it may deem appropriate in order to continue
its operations after the Closing Date.
5.9 Government Securities Trust covenants that it will, from time to
time, as and when requested by Adjustable Rate Fund, execute and deliver or
cause to be executed and delivered all such assignments and other
instruments, and will take and cause to be taken such further action, as
Adjustable Rate Fund may deem necessary or desirable in order to (i) vest
in and confirm to Adjustable Rate Fund title to and possession of all the
shares of the Intermediate Series to be transferred to Adjustable Rate Fund
pursuant to this Agreement and (ii) assume all of Adjustable Rate Fund's
liabilities in accordance with this Agreement.
6. Conditions Precedent to Obligations of Adjustable Rate Fund
The obligations of Adjustable Rate Fund to consummate the transactions
provided for herein shall be subject to the performance by Government Securities
Trust of all the obligations to be performed by it hereunder on or before the
Closing Date and the following further conditions:
6.1 All representations and warranties of Government Securities Trust
contained in this Agreement shall be true and correct in all material
respects as of the date hereof and, except as they may be affected
B-8
<PAGE> 42
by the transactions contemplated by this Agreement, as of the Closing Date
with the same force and effect as if made on and as of the Closing Date.
6.2 Government Securities Trust shall have delivered to Adjustable
Rate Fund on the Closing Date a certificate executed in its name by the
President or a Vice President of Government Securities Trust, in form and
substance satisfactory to Adjustable Rate Fund and dated as of the Closing
Date, to the effect that the representations and warranties of Government
Securities Trust in this Agreement are true and correct at and as of the
Closing Date, except as they may be affected by the transactions
contemplated by this Agreement, and as to such other matters as Adjustable
Rate Fund shall reasonably request.
6.3 Adjustable Rate Fund shall have received on the Closing Date a
favorable opinion from Sullivan & Cromwell, counsel to Government
Securities Trust, dated as of the Closing Date, to the effect that:
6.3.1 Government Securities Trust is duly organized and validly
existing as a Massachusetts business trust, with power under its
Declaration of Trust to own all of its properties and assets and, to the
knowledge of such counsel, to carry on its business as presently
conducted;
6.3.2 This Agreement has been duly authorized, executed and
delivered by Government Securities Trust and, assuming due
authorization, execution and delivery of the Agreement by Adjustable
Rate Fund, is a valid and binding obligation of Government Securities
Trust enforceable in accordance with its terms, subject to bankruptcy,
insolvency, fraudulent transfer, reorganization, moratorium and similar
laws of general applicability relating to or affecting creditors' rights
and to general equity principles (regardless of whether enforcement is
sought in a proceeding at law or in equity), and further subject to the
qualifications set forth in the next succeeding sentence. Such counsel
may state that they express no opinion as to the validity or
enforceability of any provision regarding choice of New York Law to
govern this Agreement;
6.3.3 The shares of the Intermediate Series to be distributed to
Adjustable Rate Fund shareholders under this Agreement, assuming their
due authorization and delivery as contemplated by this Agreement, will
be validly issued and outstanding and fully paid and non-assessable, and
no shareholder of Government Securities Trust has any pre-emptive right
to subscribe therefor or purchase such shares;
6.3.4 The execution and delivery of this Agreement did not, and the
consummation of the transactions contemplated hereby will not, (i)
conflict with Government Securities Trust's Declaration of Trust or
By-Laws or (ii) result in a default or a breach of (a) the Management
Agreement dated August 9, 1988 between Government Securities Trust and
Prudential Mutual Fund Management, Inc., (b) the Custodian Contract
dated July 26, 1990 between Government Securities Trust and State Street
Bank and Trust Company, (c) the Distribution Agreement with respect to
the Intermediate Series dated July 23, 1982, as amended and restated on
July 1, 1993 between Government Securities Trust and Prudential Mutual
Fund Distributors, Inc., and (d) the Transfer Agency and Service
Agreement dated January 1, 1988; provided, however, that such counsel
may state that they express no opinion in their opinion pursuant to this
paragraph 6.3.4 with respect to federal or state securities laws, other
antifraud laws and fraudulent transfer laws; provided further that
insofar as performance by Government Securities Trust of its obligations
under this Agreement is concerned, such counsel may state that they
express no opinion as to bankruptcy, insolvency, reorganization,
moratorium and similar laws of general applicability relating to or
affecting creditors' rights;
B-9
<PAGE> 43
6.3.5 To the knowledge of such counsel, no consent, approval,
authorization, filing or order of any court or governmental authority is
required for the consummation by Government Securities Trust of the
transactions contemplated herein, except such as have been obtained
under the 1933 Act, the 1934 Act and the Investment Company Act and such
as may be required under state Blue Sky or securities laws;
6.3.6 Government Securities Trust has been registered with the SEC
as an investment company, and, to the knowledge of such counsel, no
order has been issued or proceeding instituted to suspend such
registration; and
6.3.7 To the knowledge of such counsel, (a) no litigation or
administrative proceeding or investigation of or before any court or
governmental body is presently pending or threatened against Government
Securities Trust or any of its properties or assets, and (b) Government
Securities Trust is not a party to or subject to the provision of any
order, decree or judgment of any court or governmental body, which
materially and adversely affects its business, except as otherwise
disclosed.
In rendering such opinion, such counsel may state that insofar as such
opinion involves factual matters, they have relied, to the extent they deem
proper, upon certificates of officers of Government Securities Trust and
certificates of public officials. As to matters of Massachusetts law, such
counsel may rely upon opinions of Massachusetts counsel reasonably satisfactory
to Adjustable Rate Fund, in which case the opinion shall state that both they
and Adjustable Rate Fund are justified in so relying.
7. Conditions Precedent to Obligations of Government Securities Trust
The obligations of Government Securities Trust to complete the transactions
provided for herein shall be subject to the performance by Adjustable Rate Fund
of all the obligations to be performed by it hereunder on or before the Closing
Date and the following further conditions:
7.1 All representations and warranties of Adjustable Rate Fund
contained in this Agreement shall be true and correct in all material
respects as of the date hereof and, except as they may be affected by the
transactions contemplated by this Agreement, as of the Closing Date with
the same force and effect as if made on and as of the Closing Date.
7.2 Adjustable Rate Fund shall have delivered to Government Securities
Trust on the Closing Date a statement of its assets and liabilities, which
statement shall be prepared in accordance with generally accepted
accounting principles consistently applied, together with a list of its
portfolio securities showing the adjusted tax bases of such securities by
lot, as of the Closing Date, certified by the Treasurer of Adjustable Rate
Fund.
7.3 Adjustable Rate Fund shall have delivered to Government Securities
Trust on the Closing Date a certificate executed in its name by the
President or a Vice President of Adjustable Rate Fund, in form and
substance satisfactory to Government Securities Trust and dated as of the
Closing Date, to the effect that the representations and warranties of
Adjustable Rate Fund made in this Agreement are true and correct at and as
of the Closing Date except as they may be affected by the transactions
contemplated by this Agreement, and as to such other matters as Government
Securities Trust shall reasonably request.
7.4 On or immediately prior to the Closing Date, Adjustable Rate Fund
shall have declared and paid to its shareholders of record one or more
dividends and/or other distributions so that it will have distributed
substantially all (and in any event not less than ninety-eight percent) of
its investment
B-10
<PAGE> 44
company taxable income (computed without regard to any deduction for
dividends paid), net tax-exempt interest income, if any, and realized net
capital gain, if any, for all taxable years through its liquidation.
7.5 Government Securities Trust shall have received on the Closing
Date a favorable opinion from Shereff, Friedman, Hoffman & Goodman, LLP,
counsel to Adjustable Rate Fund, dated as of the Closing Date, to the
effect that:
7.5.1 Adjustable Rate Fund has been duly incorporated and is an
existing corporation in good standing under the laws of the State of
Maryland;
7.5.2 This Agreement has been duly authorized, executed and
delivered by Adjustable Rate Fund and constitutes a valid and legally
binding obligation of Adjustable Rate Fund enforceable in accordance
with its terms, subject to bankruptcy, insolvency, fraudulent transfer,
reorganization, moratorium and similar laws of general applicability
relating to or affecting creditors' rights and to general equity
principles;
7.5.3 The execution and delivery of the Agreement did not, and the
performance by Adjustable Rate Fund of its obligations hereunder will
not, (i) violate Adjustable Rate Fund's Articles of Incorporation or
By-Laws or (ii) result in a default or a breach of the Management
Agreement, dated June 1, 1992, between Adjustable Rate Fund and
Prudential Mutual Fund Management, Inc., the Custodian Agreement, dated
June 1, 1992, between Adjustable Rate Fund and State Street Bank and
Trust Company, the Distribution Agreement (Class A shares), dated July
1, 1993, between Adjustable Rate Fund and Prudential Mutual Fund
Distributors, Inc., the Distribution Agreement (Class B shares), dated
July 1, 1993, between Adjustable Rate Fund and Prudential Securities
Incorporated, and the Transfer Agency and Service Agreement, dated June
1, 1992, between Adjustable Rate Fund and Prudential Mutual Fund
Services, Inc.; provided, however, that such counsel may state that they
express no opinion in their opinion pursuant to this paragraph 7.5.3
with respect to federal or state securities laws, other antifraud laws
and fraudulent transfer laws; provided further that insofar as
performance by Adjustable Rate Fund of its obligations under this
Agreement is concerned, such counsel may state that they express no
opinion as to bankruptcy, insolvency, fraudulent transfer,
reorganization, moratorium and similar laws of general applicability
relating to or affecting creditors' rights and to general equity
principles;
7.5.4 All regulatory consents, authorizations and approvals
required to be obtained by Adjustable Rate Fund under the federal laws
of the United States, the laws of the State of New York and the General
Corporation Law of the State of Maryland for the consummation of the
transactions contemplated by this Agreement have been obtained;
7.5.5 Such counsel knows of no litigation or any governmental
proceeding instituted or threatened against Adjustable Rate Fund that
would be required to be disclosed in the Registration Statement and is
not so disclosed; and
7.5.6 Adjustable Rate Fund has been registered with the SEC as an
investment company, and, to the knowledge of such counsel, no order has
been issued or proceeding instituted to suspend such registration.
In rendering such opinion, such counsel may state that insofar as such
opinion involves factual matters, they have relied, to the extent they deem
proper, upon certificates of officers of Adjustable Rate Fund and certificates
of public officials.
B-11
<PAGE> 45
8. Further Conditions Precedent to Obligations of Government Securities
Trust and Adjustable Rate Fund
The obligations of each Fund hereunder are subject to the further
conditions that on or before the Closing Date:
8.1 This Agreement and the transactions contemplated herein shall have
been approved by the requisite vote of (a) the Directors of Adjustable Rate
Fund and the Trustees of Government Securities Trust, as to the
determinations set forth in Rule 17a-8(a) under the Investment Company Act,
(b) the Trustees of Government Securities Trust as to the assumption by
Government Securities Trust of the liabilities of Adjustable Rate Fund and
(c) the holders of the outstanding shares of Adjustable Rate Fund in
accordance with the provisions of Adjustable Rate Fund's Articles of
Incorporation, and certified copies of the resolutions evidencing such
approvals shall have been delivered to Government Securities Trust and
Adjustable Rate Fund.
8.2 Any proposed change to Intermediate Series' operations that may be
approved by the Trustees of Government Securities Trust subsequent to the
date of this Agreement but in connection with and as a condition to
implementing the transactions contemplated by this Agreement, for which the
approval of Intermediate Series' shareholders is required pursuant to the
Investment Company Act or otherwise, shall have been approved by the
requisite vote of the holders of the outstanding shares of the Intermediate
Series in accordance with the Investment Company Act and the provisions of
the Declaration of Trust of Government Securities Trust, and certified
copies of the resolution evidencing such approval shall have been delivered
to Adjustable Rate Fund.
8.3 On the Closing Date no action, suit or other proceeding shall be
pending before any court or governmental agency in which it is sought to
restrain or prohibit, or obtain damages or other relief in connection with,
this Agreement or the transactions contemplated herein.
8.4 All consents of other parties and all consents, orders and permits
of federal, state and local regulatory authorities (including those of the
SEC and of state Blue Sky or securities authorities, including "no-action"
positions of such authorities) deemed necessary by Government Securities
Trust or Adjustable Rate Fund to permit consummation, in all material
respects, of the transactions contemplated hereby shall have been obtained,
except where failure to obtain any such consent, order or permit would not
involve a risk of a material adverse effect on the assets or properties of
Government Securities Trust or Adjustable Rate Fund, provided that either
party hereto may for itself waive any part of this condition.
8.5 The Registration Statement shall have become effective under the
1933 Act, and no stop orders suspending the effectiveness thereof shall
have been issued, and to the best knowledge of the parties hereto, no
investigation or proceeding under the 1933 Act for that purpose shall have
been instituted or be pending, threatened or contemplated.
8.6 Adjustable Rate Fund and Government Securities Trust shall have
received on or before the Closing Date an opinion of Shereff, Friedman,
Hoffman & Goodman, LLP satisfactory to Adjustable Rate Fund and to
Government Securities Trust, substantially to the effect that for federal
income tax purposes:
8.6.1 The acquisition by Intermediate Series of the assets of
Adjustable Rate Fund in exchange solely for voting shares of
Intermediate Series and the assumption by Intermediate Series of
Adjustable Rate Fund's liabilities, if any, followed by the distribution
of Intermediate Series' voting shares by Adjustable Rate Fund pro rata
to its shareholders, pursuant to its liquidation and constructively in
exchange for their Adjustable Rate Fund shares, will constitute a
reorganization
B-12
<PAGE> 46
within the meaning of Section 368(a)(1)(C) of the Internal Revenue Code,
and Adjustable Rate Fund and Intermediate Series each will be "a party
to a reorganization" within the meaning of Section 368(b) of the
Internal Revenue Code;
8.6.2 Adjustable Rate Fund's shareholders will recognize no gain or
loss upon the constructive exchange of all of their shares of Adjustable
Rate Fund solely for shares of Intermediate Series in complete
liquidation of Adjustable Rate Fund;
8.6.3 No gain or loss will be recognized to Adjustable Rate Fund
upon the transfer of its assets to Intermediate Series in exchange
solely for shares of Intermediate Series and the assumption by
Intermediate Series of Adjustable Rate Fund's liabilities, if any, and
the subsequent distribution of those shares to Adjustable Rate Fund
shareholders in complete liquidation of Adjustable Rate Fund;
8.6.4 No gain or loss will be recognized to Intermediate Series
upon the acquisition of Adjustable Rate Fund's assets in exchange solely
for shares of Intermediate Series and the assumption of Adjustable Rate
Fund's liabilities, if any;
8.6.5 Intermediate Series' basis for those assets will be the same
as the basis thereof when held by Adjustable Rate Fund immediately
before the transfer, and the holding period of such assets acquired by
Intermediate Series will include the holding period thereof when held by
Adjustable Rate Fund;
8.6.6 Adjustable Rate Fund shareholders' basis for the shares of
Intermediate Series to be received by them pursuant to the
reorganization will be the same as their basis for the shares of
Adjustable Rate Fund to be constructively surrendered in exchange
thereof; and
8.6.7 The holding period of Intermediate Series shares to be
received by Adjustable Rate Fund shareholders will include the period
during which Adjustable Rate Fund shares to be constructively
surrendered in exchange therefor were held; provided such Adjustable
Rate Fund shares were held as capital assets by those shareholders on
the date of the exchange.
9. Finder's Fees and Expenses
9.1 Each Fund represents and warrants to the other that there are no
finder's fees payable in connection with the transactions provided for
herein.
9.2 The expenses incurred in connection with the entering into and
carrying out of the provisions of this Agreement shall be allocated to
Adjustable Rate Fund and Intermediate Series pro rata in a fair and
equitable manner in proportion to their respective assets.
10. Entire Agreement; Survival of Warranties
10.1 This Agreement constitutes the entire agreement between the
Funds.
10.2 The representations, warranties and covenants contained in this
Agreement or in any document delivered pursuant hereto or in connection
herewith shall survive the consummation of the transactions contemplated
hereunder.
11. Termination
Either Fund may at its option terminate this Agreement at or prior to the
Closing Date because of:
11.1 A material breach by the other of any representation, warranty or
covenant contained herein to be performed at or prior to the Closing Date;
or
B-13
<PAGE> 47
11.2 A condition herein expressed to be precedent to the obligations
of either party not having been met and it reasonably appearing that it
will not or cannot be met; or
11.3 A mutual written agreement of Adjustable Rate Fund and Government
Securities Trust, on behalf of Intermediate Series.
In the event of any such termination, there shall be no liability for
damages on the part of either Fund (other than the liability of the Funds to pay
their allocated expenses pursuant to paragraph 9.2) or any Director, Trustee or
officer of Government Securities Trust or Adjustable Rate Fund.
12. Amendment
This Agreement may be amended, modified or supplemented only in writing by
the parties; provided, however, that following the shareholders' meeting called
by Adjustable Rate Fund pursuant to paragraph 5.2, no such amendment may have
the effect of changing the provisions for determining the number of shares of
Intermediate Series to be distributed to Adjustable Rate Fund shareholders under
this Agreement to the detriment of such shareholders without their further
approval.
13. Notices
Any notice, report, demand or other communication required or permitted by
any provision of this Agreement shall be in writing and shall be given by hand
delivery, or prepaid certified mail or overnight service addressed to Prudential
Mutual Fund Management, Inc., One Seaport Plaza, New York, New York 10292,
Attention: S. Jane Rose.
14. Headings; Counterparts; Governing Law; Assignment
14.1 The paragraph headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
14.2 This Agreement may be executed in any number of counterparts,
each of which will be deemed an original.
14.3 This Agreement shall be governed by and construed in accordance
with the laws of the State of New York.
14.4 This Agreement shall bind and inure to the benefit of the parties
and their respective successors and assigns, and no assignment or transfer
hereof or of any rights or obligations hereunder shall be made by either
party without the written consent of the other party. Nothing herein
expressed or implied is intended or shall be construed to confer upon or
give any person, firm or corporation other than the parties and their
respective successors and assigns any rights or remedies under or by reason
of this Agreement.
15. Miscellaneous
The Trustees of Government Securities Trust have authorized the execution
of this Agreement in their capacity as Trustees and not individually and
Adjustable Rate Fund agrees that neither the shareholders nor the Trustees nor
any officer, employee, representative or agent of Government Securities Trust
shall be personally liable upon, nor shall resort be had to their private
property for the satisfaction of, obligations given, executed or delivered on
behalf of or by Government Securities Trust, that the shareholders shall not be
personally liable hereunder, and that Adjustable Rate Fund shall look solely to
the property of Intermediate Series for the satisfaction of any claim hereunder.
B-14
<PAGE> 48
IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
executed by the President or Vice President of each Fund.
Prudential Adjustable Rate Securities
Fund, Inc.
By
------------------------------------
President/Vice President
Prudential Government Securities Trust
on behalf of its Intermediate Term
Series
By
------------------------------------
President/Vice President
B-15
<PAGE> 49
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
SYNOPSIS............................................................................... 2
General........................................................................... 2
The Proposed Reorganization and Liquidation....................................... 2
Reasons for the Proposed Reorganization and Liquidation........................... 3
Certain Differences Between Intermediate Series and Adjustable Rate Fund.......... 5
Structure of Intermediate Series and Adjustable Rate Fund......................... 7
Investment Objectives and Policies................................................ 8
Fees and Expenses................................................................. 9
Management Fees.............................................................. 9
Distribution Fees............................................................ 10
Other Expenses............................................................... 11
Fee Waivers and Subsidy...................................................... 11
Expense Ratios............................................................... 11
Purchases and Redemptions......................................................... 12
Exchange Privileges............................................................... 13
Dividends and Distributions....................................................... 13
Federal Tax Consequences of Proposed Reorganization............................... 13
PRINCIPAL RISK FACTORS................................................................. 14
THE PROPOSED TRANSACTION............................................................... 14
Agreement and Plan of Reorganization and Liquidation.............................. 14
Reasons for the Reorganization and Liquidation.................................... 16
Description of Securities to be Issued............................................ 16
Tax Considerations................................................................ 16
Certain Comparative Information About the Funds................................... 17
Organization................................................................. 17
Capitalization............................................................... 17
Shareholder Meetings and Voting Rights....................................... 17
Shareholder Liability........................................................ 18
Liability and Indemnification of Directors/Trustees.......................... 18
Pro Forma Capitalization and Ratios............................................... 18
INFORMATION ABOUT INTERMEDIATE SERIES.................................................. 19
INFORMATION ABOUT ADJUSTABLE RATE FUND................................................. 21
VOTING INFORMATION..................................................................... 22
OTHER MATTERS.......................................................................... 23
SHAREHOLDERS' PROPOSALS................................................................ 23
APPENDIX A -- Performance Overview..................................................... A-1
APPENDIX B -- Agreement and Plan of Reorganization and Liquidation..................... B-1
TABLE OF CONTENTS
ENCLOSURES
Prospectus of Intermediate Series dated April 3, 1995, including a May 12, 1995
Supplement thereto.
Prospectus of Adjustable Rate Fund dated June , 1995.
Annual Report of Adjustable Rate Fund for the fiscal year ended February 28, 1995.
</TABLE>
<PAGE> 50
PRUDENTIAL GOVERNMENT SECURITIES TRUST
STATEMENT OF ADDITIONAL INFORMATION
DATED JUNE , 1995
ACQUISITION OF ASSETS OF
PRUDENTIAL ADJUSTABLE RATE SECURITIES FUND, INC.
ONE SEAPORT PLAZA
NEW YORK, NEW YORK 10292
(800) 225-1852
------------------
BY AND IN EXCHANGE FOR THE SHARES OF
PRUDENTIAL GOVERNMENT SECURITIES TRUST -- INTERMEDIATE TERM SERIES
ONE SEAPORT PLAZA
NEW YORK, NEW YORK 10292
(800) 225-1852
This Statement of Additional Information, relating specifically to the
proposed transfer of all the assets and the assumption of all the liabilities,
if any, of Prudential Adjustable Rate Securities Fund, Inc. (the Acquired Fund)
by Prudential Government Securities Trust -- Intermediate Term Series (the
Acquiring Fund) consists of this cover pages, the attached pro forma financial
statements and the following described documents, each of which is attached
hereto and incorporated herein by reference.
1. The Statement of Additional Information of the Acquiring Fund dated
April 3, 1995 to the extent that it relates to the Acquiring Fund only
and not to any other series of Prudential Government Securities Trust;
and
2. The Annual Report to Shareholders of the Acquired Fund for the fiscal
year ended February 28, 1995.
The Statement of Additional Information is not a prospectus. A Prospectus
and Proxy Statement dated June , 1995 relating to the above referenced matter
may be obtained from the Acquiring Fund without charge by writing or calling
Prudential Government Securities Trust, at the address or telephone number
listed above. This Statement of Additional Information relates to, and should be
read in conjunction with, the Prospectus and Proxy Statement.
1
<PAGE> 51
FINANCIAL STATEMENTS
The following are pro forma financial statements which give effect to the
proposed transaction whereby all the assets of Prudential Adjustable Rate
Securities Fund, Inc. will be exchanged for shares of Prudential Government
Securities Trust Intermediate Series and Prudential Government Securities Trust
Intermediate Series will assume the liabilities, if any, of Prudential
Adjustable Rate Securities Fund, Inc. Immediately thereafter, the shares of
Prudential Government Securities Trust Intermediate Series will be distributed
to the shareholders of Prudential Adjustable Rate Securities Fund, Inc. in a
total liquidation of Prudential Adjustable Rate Securities Fund, Inc. which will
subsequently be dissolved. The following pro forma financial statements include
a pro forma Portfolio of investments at November 30, 1994, a pro forma Statement
of Assets and Liabilities at November 30, 1994 and a pro forma Statement of
Operations for the year ended November 30, 1994.
PRO-FORMA FINANCIAL STATEMENTS
PRO-FORMA PORTFOLIO OF INVESTMENTS
NOVEMBER 30, 1994
(UNAUDITED)
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE
------------------------------- --------------------------------------------- -------------------------------------------
<C> <C> <C> <S> <C> <C> <C>
PRUDENTIAL PRUDENTIAL
ADJ. GOVERNMENT PRUDENTIAL
RATE SECURITIES PRUDENTIAL GOVERNMENT
SECURITIES INTER. ADJ. RATE SECURITIES
FUND SERIES SECURITIES INTER. PRO-FORMA
(000) (000) TOTAL FUND SERIES COMBINED
----- ------ ------ ----------- ------------ ------------
<CAPTION>
<C> <C> <C> <S> <C> <C> <C>
LONG-TERM INVESTMENTS
FEDERAL HOME LOAN MORTGAGE CORPORATION
3,206 3,206 7.375%, 7/1/22............................... $ 3,238,335 $ 3,238,335
6,879 6,879 6.349%, 10/1/23.............................. 6,965,010 6,965,010
5,534 5,534 5.125%, 5/1/24............................... 5,448,880 5,448,880
73 73 8.00%, 6/1/24................................ $ 69,521 69,521
9,892 9,892 5.003%, 7/1/24............................... 9,648,248 9,648,248
8,102 8,102 5.00%, 8/1/24................................ 7,887,229 7,887,229
5,109 5,109 Zero Coupon, 10/1/29......................... 5,108,848 5,108,848
----------- ------------ ------------
38,296,550 69,521 38,366,071
----------- ------------ ------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION
21 21 7.50%, 10/1/01............................... 20,019 20,019
------------ ------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION
6,671 6,671 6.00%, 7/20/24............................... 6,372,996 6,372,996
4,052 4,052 6.00%, 8/20/24............................... 3,870,503 3,870,503
5,056 5,056 Zero Coupon, 7/20/24 - 8/20/24............... 4,829,768 4,829,768
8,478 8,478 6.00%, 9/20/24............................... 8,099,204 8,099,204
----------- ------------ ------------
4,829,768 18,342,703 23,172,471
----------- ------------ ------------
RESOLUTION TRUST CORPORATION MORTGAGE
PASS-THROUGH
8,201 8,201 6.03%, 12/25/20.............................. 8,275,190 8,275,190
----------- ------------
UNITED STATES TREASURY NOTES
41,000* 41,000 4.00%, 1/31/96............................... 39,603,540 39,603,540
17,000* 17,000 4.75%, 2/15/97............................... 16,057,010 16,057,010
16,000* 16,000 8.50%, 4/15/97............................... 16,329,920 16,329,920
99,000 99,000 5.125%, 11/30/98............................. 90,120,690 90,120,690
6,000 6,000 7.25%, 8/15/04............................... 5,725,320 5,725,320
20,000 20,000 7.875%, 11/15/04............................. 19,867,969 19,867,969
------------ ------------
187,704,449 187,704,449
------------ ------------
Total Long-Term Investments (cost
$261,968,300)............................... 51,401,508 206,136,692 257,538,200
----------- ------------ ------------
SHORT-TERM INVESTMENTS
FEDERAL NATIONAL MORTGAGE ASSOCIATION
6,000 6,000 5.93%, 1/10/95 (cost $5,998,704)............. 5,998,704 5,998,704
----------- ------------
JOINT REPURCHASE AGREEMENT ACCOUNT
5,286 1,439 6,725 5.692%, 12/1/94 (cost $6,725,000)............ 5,286,000 1,439,000 6,725,000
----------- ------------ ------------
Total Short-Term Investments (cost
$12,723,704)................................ 11,284,704 1,439,000 12,723,704
----------- ------------ ------------
TOTAL INVESTMENTS (cost $274,692,004)........ 62,686,212 207,575,692 270,261,904
Other assets in excess of liabilities........ 8,032,205 34,404,415 42,436,620
----------- ------------ ------------
NET ASSETS................................... $70,718,417 $241,980,107 $312,698,524
============= ============== ==============
</TABLE>
- ---------------
* Asset segregated for dollar rolls.
2
<PAGE> 52
PRO-FORMA STATEMENT OF ASSETS AND LIABILITIES
NOVEMBER 30, 1994
(UNAUDITED)
<TABLE>
<CAPTION>
PRUDENTIAL
PRUDENTIAL GOVERNMENT
ADJ. RATE SECURITIES
SECURITIES INTER. PRO-FORMA PRO-FORMA
FUND SERIES ADJUSTMENTS COMBINED
----------- ------------ -------- ------------
<S> <C> <C> <C> <C>
ASSETS
Investments, at value (cost $63,515,114 and
$211,176,890 and $274,692,004, respectively)..... $62,686,212 $207,575,692 $270,261,904
Interest receivable................................ 1,003,798 1,507,746 2,511,544
Receivable for investments sold.................... 11,738,594 54,380,133 66,118,727
Receivable for Fund and Series shares sold,
respectively..................................... 14,872,266 37,209 14,909,475
Fees receivable on securities loaned............... 17,196 17,196
Deferred expenses and other assets................. 93,457 10,022 (92,476)* 11,003
----------- ------------ -------- ------------
Total assets............................... 90,394,327 263,527,998 (92,476) 353,829,849
----------- ------------ -------- ------------
LIABILITIES
Investments sold short, at value (proceeds
$14,872,266)..................................... 14,901,600 14,901,600
Payable for investments purchased.................. 2,992,500 19,989,792 22,982,292
Payable for shares reacquired...................... 1,584,162 1,061,352 2,645,514
Accrued expenses and other liabilities............. 129,980 29,452 159,432
Dividends payable.................................. 67,668 355,635 423,303
Due to Manager..................................... 81,260 81,260
Due to Distributors................................ 30,400 30,400
----------- ------------ ------------
Total liabilities.......................... 19,675,910 21,547,891 41,223,801
----------- ------------ ------------
Net Assets......................................... 70,718,417 241,980,107 312,606,048
=========== ============ ============
Net assets were comprised of:
Common stock at par............................ 75,216 (75,216)** --
Shares of beneficial interest, at par ($.01 per
share)....................................... 263,903 77,119** 341,022
Paid in capital in excess of par............... 81,036,617 326,069,502 (94,379)** 407,011,740
----------- ------------ -------- ------------
81,111,833 326,333,405 (92,476) 407,352,762
----------- ------------ -------- ------------
Undistributed net investment income................ 2,133,743 2,133,743
Accumulated net realized losses.................... (9,302,517) (82,885,843) (92,188,360)
Net unrealized depreciation of investments......... (1,090,899) (3,601,198) (4,692,097)
----------- ------------ ------------
Net assets as of November 30, 1994................. 70,718,417 241,980,107 312,606,048
=========== ============ ============
Shares of beneficial interest issued and
outstanding...................................... 26,390,334 34,102,272
============ ============
Net asset value................................ $ 9.17 $ 9.17
============ ============
Class A:
Net asset value and redemption price per share
($69,543,306/7,397,043 shares of common stock
issued and outstanding)...................... $ 9.40
Maximum sales charge (1.0% of offering
price)....................................... 0.09
-----------
9.49
===========
Class B:
Net asset value and redemption price per share
($1,175,111/124,558 shares of common stock
issued and outstanding)...................... $ 9.43
===========
</TABLE>
- ---------------
* Adjustment to reflect the write-off of unamortized deferred organization
costs of Adjustable Rate Securities Fund.
** Adjustment to reflect the exchange of common stock of Adjustable Rate
Securities Fund for shares of beneficial interest in Government Securities
Trust Intermediate Series.
3
<PAGE> 53
PRO-FORMA STATEMENT OF OPERATIONS
YEAR ENDED NOVEMBER 30, 1994
(UNAUDITED)
<TABLE>
<CAPTION>
PRUDENTIAL
PRUDENTIAL GOVERNMENT
ADJ. RATE SECURITIES
SECURITIES INTER. PRO-FORMA PRO-FORMA
FUND SERIES ADJUSTMENTS COMBINED
----------- ------------ -------- ------------
<S> <C> <C> <C> <C>
NET INVESTMENT INCOME
Income
Interest................................. $ 4,860,819 $ 19,425,626 $ 24,286,445
Income from securities loaned............ 22,315 22,315
----------- ------------ ------------
Total Income........................ 4,860,819 19,447,941 24,308,760
----------- ------------ ------------
Expenses
Management fee........................... 586,208 1,229,526 (134,694)(a) 1,681,040
Distribution fee......................... 43,257 665,503 336,735 (b) 1,045,495
Transfer agent's fees & expenses......... 74,250 384,000 458,000
Custodian's fees & expenses.............. 144,000 120,000 (60,000)(c) 204,000
Registration fees........................ 74,750 61,000 135,000
Reports to shareholders.................. 60,375 57,000 (30,000)(c) 87,375
Audit fee................................ 42,000 35,000 (37,000)(c) 40,000
Directors & Trustees' fees............... 48,000 15,200 (48,000)(c) 15,200
Amortization of deferred organizational
expenses............................... 33,400 92,476 (d) 125,876
Legal fees............................... 13,250 16,000 (13,250)(c) 16,000
Insurance expense........................ 4,900 8,000 (4,900)(c) 8,000
Miscellaneous............................ 4,509 4,101 (4,000)(c) 4,610
----------- ------------ -------- ------------
Total Expenses...................... 1,128,899 2,595,330 (97,367) 3,821,596
----------- ------------ -------- ------------
Net investment income........................ 3,731,920 16,852,611 (97,367) 20,487,164
----------- ------------ -------- ------------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Net realized gain (loss)..................... (1,187,710) (15,205,293) (16,393,003)
Net change in unrealized appreciation........ (1,109,891) (10,351,690) (11,461,581)
----------- ------------ ------------
Net gain (loss) on investments........... (2,297,601) (25,556,983) (27,854,584)
----------- ------------ ------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS.................. $ 1,434,319 $ (8,704,372) (97,367) $ (7,367,420)
=========== ============ ======== ============
</TABLE>
- ---------------
(a) Adjustment to reflect reduction in management fees of Government Securities
Trust Intermediate Series.
(b) Adjustment to reflect distribution fee on Government Securities Trust
Intermediate Series.
(c) Adjustment to reflect elimination of duplicative expenses.
(d) Adjustment to reflect the write off of unamortized deferred organization
costs of Adjustable Rate Fund.
4
<PAGE> 54
NOTES TO PRO-FORMA FINANCIAL STATEMENTS
The Prudential Government Securities Trust Intermediate Series (the "Fund")
is registered under the Investment Company Act of 1940 as a diversified,
open-end management investment company.
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.
The Fund values portfolio securities on the basis of current market
quotations provided by a pricing service authorized by the Trustees. 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 Fund 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 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. 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 Fund 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
Fund forgoes principal and interest paid on the securities. The Fund 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 Fund
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.
5
<PAGE> 55
EQUALIZATION: The Fund 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.
DIVIDENDS AND DISTRIBUTIONS: The Fund 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 Corporations ("PIC"); PIC furnishes investment advisory services in
connection with the management of the Fund. PMF pays for the costs 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 Fund.
To reimburse PSI for its expenses as distributor, the Fund 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.
6
<PAGE> 56
PRUDENTIAL GOVERNMENT SECURITIES TRUST
Statement of Additional Information
dated April 3, 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
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 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 Intermediate Term Series
Prospectus, each dated April 3, 1995, copies of which may be obtained from the
Trust upon request.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
CROSS-REFERENCE
CROSS-REFERENCE TO PAGE IN U.S. CROSS-REFERENCE
TO PAGE IN TREASURY MONEY TO PAGE IN
MONEY MARKET MARKET SERIES INTERMEDIATE TERM
PAGE SERIES PROSPECTUS PROSPECTUS SERIES PROSPECTUS
---- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
General Information....................... B-2 11 11 13
Investment Objective(s) and Policies...... B-3 --
Money Market Series.................. B-3 6 --
U.S. Treasury Money Market Series.... B-4 -- 6 --
Intermediate Term Series............. B-5 -- -- 6
Portfolio Turnover........................ B-5 -- -- --
Investment Restrictions................... B-6 7 7 8
Trustees and Officers..................... B-7 8 8 9
Manager................................... B-9 8 8 9
Distributor............................... B-11 8 8 9
Portfolio Transactions and Brokerage...... B-12 10 9 11
Shareholder Investment Account............ B-13 17 18 18
Net Asset Value........................... B-16 10 10 11
Performance Information................... B-16
Money Market Series and U.S. Treasury
Money Market Series--Calculation of
Yield.............................. B-16 6 6 --
Intermediate Term Series--Calculation
of Yield and Total Return.......... B-17 -- -- 12
Taxes..................................... B-18 10 10 12
Custodian and Transfer and Dividend
Disbursing Agent and Independent
Accountants............................. B-18 10 10 11
Financial Statements...................... B-19 -- -- --
Report of Independent Accountants......... B-33 -- -- --
============================================================================================================
</TABLE>
<PAGE> 57
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 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 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 (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> 58
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.
INVESTMENT OBJECTIVES AND POLICIES
The Money Market Series, the U.S. Treasury Money Market Series and the
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
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.
In order to achieve their objectives, the Money Market Series, the U.S.
Treasury Money Market Series and the 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.
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 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
B-3
<PAGE> 59
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.
B-4
<PAGE> 60
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.
INTERMEDIATE TERM SERIES
The Intermediate Term Series seeks to achieve its objective by
investing in United States Government securities that have maturities of ten
years or less, 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. Such obligations are more fully
described under ``Investment Objective and Policies'' in the Prospectus.
The Intermediate Term Series will make purchases and sales of portfolio
securities from the issuer or a government securities dealer on a net price
basis; brokerage commissions are not normally charged on the purchase or sale
of securities such as United States Government obligations. See ``Portfolio
Transactions and Brokerage.''
The Intermediate Term Series intends to vary the proportion of its
holdings of long-and short-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
Intermediate Term Series' investment adviser, interest rates generally are
expected to decline, the 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 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
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.
The Intermediate Term Series' investment adviser currently anticipates
that investments will primarily be made in securities with maturities ranging
from 2 to 5 years, but depending on market conditions and changing economic
conditions the Intermediate Term Series may invest in securities of any
maturity 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.
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 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 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
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 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 Intermediate Term Series. The portfolio
turnover rate for the Intermediate Term Series for the fiscal years ended
November 30, 1993 and 1994 was 44% and 431%, respectively. The increase in the
Intermediate Term Series' portfolio turnover rate resulted in part from the
repositioning of its portfolio by its current portfolio manager, who commenced
managing the Series' portfolio in November 1993. 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 Intermediate Term Series' higher
turnover rate.
B-5
<PAGE> 61
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 AND INTERMEDIATE TERM SERIES
The following investment restrictions are fundamental policies of the
Trust with respect to the Money Market Series and the Intermediate Term Series
of the Trust and may not be changed except as described above.
The Trust may not:
1. As to any Series, invest in any securities other than the types of
securities listed under the ``Investment Objectives and Policies'' relating to
such Series;
2. 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;
3. 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;
4. 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 Trust's
total assets);
5. Purchase or sell real estate or real estate mortgage loans;
6. Purchase securities on margin or sell short;
7. Purchase or sell commodities or commodity futures contracts, or oil,
gas, or mineral exploration or development programs;
8. Purchase securities for which there are legal or contractual
restrictions on resale (i.e. restricted securities) or invest more than 10% of
its assets in securities for which there is no readily available market, except
for repurchase agreements for seven days or less;
9. Underwrite securities of other issuers;
10. Purchase warrants, or write, purchase or sell puts, calls, straddles,
spreads or combinations thereof except that the Money Market Series may
purchase instruments together with the right to resell such instruments;
11. Purchase the securities of any other investment company, except in
connection with a merger, consolidation, reorganization or acquisition of
assets;
12. 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;
and
13. Purchase securities on a when-issued basis if, as a result, more than
15% of the Trust's net assets would be committed.
If a percentage restriction is adhered to at the time of investment, a
later increase or decrease in percentage resulting from a change in values of
portfolio securities or amount of total or net assets will not be considered a
violation of any of the foregoing restrictions. However, in the event that
either Series' asset coverage for borrowings falls below 300%, that Series will
take prompt action to reduce its borrowings, as required by applicable law.
In addition, although not as fundamental policies of the Trust, the Trust
will apply the percentage limitations set forth in Investment Restrictions Nos.
2, 8 and 13 separately to investments made by each of the Money Market Series
and the Intermediate Term Series.
B-6
<PAGE> 62
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:
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).
10. Purchase securities for which there are legal or contractual
restrictions on resale (i.e. restricted securities) or invest more than 10% of
its assets in securities for which there is no readily available market, except
for repurchase agreements for seven days or less.
Whenever any fundamental investment policy or investment restriction states
a maximum percentage of the U.S. Treasury Money Market 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 the U.S. Treasury Money Market 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>
Delayne Dedrick Gold (56) Trustee Marketing and Management Consultant.
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 Fund Chairman of the Board of Consolidated Edison Company of
Management, Inc. New York, Inc.; Director of COMSAT Corp.
One Seaport Plaza
New York, NY
</TABLE>
B-7
<PAGE> 63
<TABLE>
<CAPTION>
POSITION WITH PRINCIPAL OCCUPATIONS
NAME, ADDRESS AND AGE TRUST DURING PAST 5 YEARS
- ---------------------- -------------- ---------------------
<S> <C> <C>
*Lawrence C. McQuade (67) President Vice Chairman of PMF (since 1988); Managing Director,
One Seaport Plaza and Trustee Investment Banking , Prudential Securities Incorporated
New York, NY (Prudential Securities) (1988-1991); Director of Czech
and Slovak American Enterprise Fund (since October
1994), Quixote Corporation (since February 1992) and
BUNZL, P.L.C. (since June 1991); formerly, Director of
Crazy Eddie Inc. (1987-1990), Kaiser Tech, Ltd. and
Kaiser Aluminum and Chemical Corp. (March 1987-November
1988); formerly Executive Vice President and Director of
WR Grace & Company; President and Director of The Global
Government Plus Fund, Inc., The Global Total Return
Fund, Inc. and The High Yield Income Fund, Inc.
Stephen P. Munn (52) Trustee Chairman (since January 1994), Director and President
101 South Salina Street (since 1988) and Chief Executive Officer (1988-December
Syracuse, NY 1993) of Carlisle Companies Incorporated.
Louis A. Weil, III (54) Trustee Publisher and Chief Executive Officer, Phoenix Newspapers,
120 E. Van Buren Inc. (since August 1991); Director of Central
Phoenix, AZ Newspapers, Inc. (since September 1991); prior thereto,
Publisher of Time Magazine (May 1989-March 1991);
formerly President, Publisher and Chief Executive
Officer of The Detroit News (February 1986-August 1989);
formerly member of the Advisory Board, Chase Manhattan
Bank-Westchester; Director of The Global Government Plus
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 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
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 (36) 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); 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.
B-8
<PAGE> 64
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.
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.
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)*
Arthur Hauspurg--Trustee $9,000 None N/A $ 37,500(5)*
Stephen P. Munn--Trustee $9,000 None N/A $ 40,000(6)*
Louis A. Weil, III--Trustee $9,000 None N/A $ 97,500(12)*
- ------------------
</TABLE>
* Indicates number of funds in Fund Complex (Including the Trust) to which
aggregate compensation relates.
As of January 6, 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 Intermediate
Term Series of the Trust.
As of January 6, 1995, Prudential Securities was the record holder for
other beneficial owners of 12,985,683 Intermediate Term Series Shares (or 54%
of such shares outstanding), 493,761,686 Money Market Series Shares (or 80% of
such shares outstanding) and 514,185,764 U.S. Treasury Money Market Series
Shares (or 99% 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 February 28, 1995, PMF managed and/or
administered open-end and closed-end management investment companies with
assets of approximately $46 billion. According to the Investment Company
Institute, as of April 30, 1994, the Prudential Mutual Funds were the 12th
largest family of mutual funds in the United States.
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 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:
B-9
<PAGE> 65
(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 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 the 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,
1994 and by a majority of the outstanding shares of the Money Market Series and
the 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, 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, 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, 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 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.
B-10
<PAGE> 66
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, 1994, and by the shareholders of each of the Money
Market Series and the 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 The Prudential Insurance
Company of America (The Prudential) which, as of December 31, 1993, was one of
the largest financial institutions in the world and the largest insurance
company in North America. The Prudential has been engaged in the insurance
business since 1875. In July 1994, Institutional Investor ranked The Prudential
the second largest institutional money manager of the 300 largest money
management organizations in the United States as of December 31, 1993.
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
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 National Association of Securities Dealers, Inc. (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 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.
For the fiscal year ended November 30, 1994, Prudential Securities
received $665,503 from the Intermediate Term Series under the Plan all
of which was spent on behalf of the Intermediate Term Series for the payment of
account servicing fees to financial advisers.
Pursuant to Rule 12b-1, the Distribution and Service Plan of the Money
Market Series and Distribution and Service Plan of the Intermediate Term Series
were approved by the vote of a majority of their outstanding voting securities
on April 28, 1988 and June 26, 1985, respectively, and the Distribution and
Service Plan of the U.S. Treasury Money Market Series was approved by a
majority of its outstanding voting securities on November 26, 1991
(collectively referred to as the Plans). 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, 1994.
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 of 1933, as amended.
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.
B-11
<PAGE> 67
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 Trustees who are not interested persons of the Trust and have no
direct or indirect financial interest in the operation of the Plans or the
Distribution Agreements on May 2,1994.
On October 21, 1993, PSI entered into an omnibus settlement with the SEC,
state securities regulators in 51 jurisdictions and the NASD to resolve
allegations that PSI sold interests in more than 700 limited partnerships (and
a limited number of other types of securities) from January 1, 1980 through
December 31, 1990, in violation of securities laws to persons for whom such
securities were not suitable in light of the individuals' financial condition
or investment objectives. It was also alleged that the safety, potential
returns and liquidity of the investments had been misrepresented. The limited
partnerships principally involved real estate, oil and gas producing properties
and aircraft leasing ventures. The SEC Order (i) included findings that PSI's
conduct violated the federal securities laws and that an order issued by the
SEC in 1986 requiring PSI to adopt, implement and maintain certain supervisory
procedures had not been complied with; (ii) directed PSI to cease and desist
from violating the federal securities laws and imposed a $10 million civil
penalty; and (iii) required PSI to adopt certain remedial measures including
the establishment of a Compliance Committee of its Board of Directors. Pursuant
to the terms of the SEC settlement, PSI established a settlement fund in the
amount of $330,000,000 and procedures, overseen by a court approved Claims
Administrator, to resolve legitimate claims for compensatory damages by
purchasers of the partnership interests. PSI has agreed to provide additional
funds, if necessary, for that purpose. PSI's settlement with the state
securities regulators included an agreement to pay a penalty of $500,000 per
jurisdiction. PSI consented to a censure and to the payment of a $5,000,000
fine in settling the NASD action. In settling the above referenced matters, PSI
neither admitted nor denied the allegations asserted against it.
On January 18, 1994, PSI agreed to the entry of a Final Consent Order and
a Parallel Consent Order by the Texas Securities Commissioner. The firm also
entered into a related agreement with the Texas Securities Commissioner. The
allegations were that the firm had engaged in improper sales practices and
other improper conduct resulting in pecuniary losses and other harm to
investors residing in Texas with respect to purchases and sales of limited
partnership interests during the period of January 1, 1980 through December 31,
1990. Without admitting or denying the allegations, PSI consented to a
reprimand, agreed to cease and desist from future violations, and to provide
voluntary donations to the State of Texas in the aggregate amount of
$1,500,000. The firm agreed to suspend the creation of new customer accounts,
the general solicitation of new accounts, and the offer for sale of securities
in or from PSI's North Dallas office to new customers during a period of twenty
consecutive business days, and agreed that its other Texas offices would be
subject to the same restrictions for a period of five consecutive business
days. PSI also agreed to institute training programs for its securities
salesmen in Texas.
On October 27, 1994, Prudential Securities Group, Inc. 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, 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
B-12
<PAGE> 68
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 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, Intermediate Term
Series and U.S. Treasury Money Market Series shareholders the privilege of
exchanging their shares for shares of either 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, 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.
B-13
<PAGE> 69
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
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
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 $4,800 at a public
university. Assuming these costs increase at a rate of 7% a year, as has been
projected, for the freshman class of 2007, the cost of four years at a private
college could reach $163,000 and over $97,000 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
universities is available from The College Board Annual Survey of Colleges,
1992. Information about the costs of private colleges is from the Digest of
Education Statistics, 1992; The National Center for Educational Statistics; and
the U.S. Department of Education. Average costs for private institutions
include tuition, fees, room and board.
(2) The chart assumes an effective rate of return of 8% (assuming monthly
compounding). This example is for illustrative purposes only and is not intended
to reflect the performance of an investment in shares of the Fund. The
investment return and principal value of an investment will fluctuate so that an
investor's shares when redeemed may be worth more or less than their original
cost.
B-14
<PAGE> 70
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.
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.
TAX-DEFERRED COMPOUNDING(1)
<TABLE>
<CAPTION>
CONTRIBUTIONS PERSONAL
MADE OVER: SAVINGS IRA
-------------- -------- --------
<S> <C> <C>
10 years $ 26,165 $ 31,291
15 years 44,675 58,649
20 years 68,109 98,846
25 years 97,780 157,909
30 years 135,346 244,692
</TABLE>
- ------------------
(1)The chart is for illustrative purposes only and does not represent the
performance of the Fund or any specific investment. It shows taxable versus
tax-deferred compounding for the periods and on the terms indicated. Earnings
in the IRA account will be subject to tax when withdrawn from the account.
B-15
<PAGE> 71
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 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.
INTERMEDIATE TERM SERIES
In determining the value of the assets of the Intermediate Term Series, 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 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
series' shares shall be determined at a time between such closing and 4:15 or
4:30, New York time, as appropriate.
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.
(365/7)
Effective yield = [(base period return + 1) ]-1
B-16
<PAGE> 72
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.
INTERMEDIATE TERM SERIES--CALCULATION OF YIELD AND TOTAL RETURN
YIELD. The 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
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:
a - b (6)
YIELD = 2 [( ----- + 1) - 1]
cd
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding during the period
that were entitled to receive dividends.
d = the 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 Intermediate Term Series' 30-day yield for the period ended November
30, 1994 was 6.52%.
AVERAGE ANNUAL TOTAL RETURN. The 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:
(n)
P(1+T) = 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 November 30, 1994 was -2.58%, 6.29% and 8.22%,
respectively.
AGGREGATE TOTAL RETURN. The 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.
B-17
<PAGE> 73
Aggregate total return does not take into account any federal or state
income taxes that may be payable upon redemption.
The Intermediate Term Series' aggregate total return for the one, five and
ten year periods ended November 30, 1994 was -2.58%, 35.64% and 120.26%,
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 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 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-18
<PAGE> 74
PRUDENTIAL GOVERNMENT SECURITIES TRUST PORTFOLIO OF INVESTMENTS
MONEY MARKET SERIES NOVEMBER 30, 1994
<TABLE>
<CAPTION>
- --------------------------------------------------------
PRINCIPAL
AMOUNT VALUE
(000) DESCRIPTION (NOTE 1)
- --------------------------------------------------------
<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+--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-19
<PAGE> 75
PRUDENTIAL GOVERNMENT SECURITIES TRUST
MONEY MARKET SERIES
<TABLE>
<CAPTION>
- --------------------------------------------------------
PRINCIPAL
AMOUNT VALUE
(000) DESCRIPTION (NOTE 1)
- --------------------------------------------------------
<S> <C>
REPURCHASE AGREEMENTS+ --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-20
<PAGE> 76
PRUDENTIAL GOVERNMENT SECURITIES TRUST
MONEY MARKET SERIES
<TABLE>
<CAPTION>
- --------------------------------------------------------
PRINCIPAL
AMOUNT VALUE
(000) DESCRIPTION (NOTE 1)
- --------------------------------------------------------
<S> <C>
REPURCHASE AGREEMENTS+--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.
+ Repurchase Agreements are collateralized by U.S.
Treasury or Federal agency obligations.
See Notes to Financial Statements.
B-21
<PAGE> 77
PRUDENTIAL GOVERNMENT SECURITIES TRUST PORTFOLIO OF INVESTMENTS
INTERMEDIATE TERM SERIES NOVEMBER 30, 1994
<TABLE>
<CAPTION>
- --------------------------------------------------------
PRINCIPAL
AMOUNT VALUE
(000) DESCRIPTION (NOTE 1)
- --------------------------------------------------------
<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-22
<PAGE> 78
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)
- --------------------------------------------------------
<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-23
<PAGE> 79
PRUDENTIAL GOVERNMENT SECURITIES TRUST
STATEMENT OF ASSETS AND LIABILITIES
NOVEMBER 30, 1994
<TABLE>
<CAPTION>
US TREASURY
MONEY MONEY
MARKET INTERMEDIATE MARKET
SERIES TERM SERIES SERIES
------------ ------------ ------------
<S> <C> <C> <C>
ASSETS
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-24
<PAGE> 80
PRUDENTIAL GOVERNMENT SECURITIES TRUST
STATEMENT OF OPERATIONS
YEAR ENDED NOVEMBER 30, 1994
<TABLE>
<CAPTION>
US TREASURY
MONEY MONEY
MARKET INTERMEDIATE MARKET
SERIES TERM SERIES SERIES
----------- ------------ -----------
<S> <C> <C> <C>
NET INVESTMENT INCOME
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-25
<PAGE> 81
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,
-----------------------------------------------------------------------------------------------------
1994 1993 1994 1993 1994 1993
--------------- --------------- ------------- ------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE)
IN NET ASSETS
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-26
<PAGE> 82
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
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
B-27
<PAGE> 83
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
TRANSACTIONS
WITH AFFILIATES
Prudential Mutual Fund Services, Inc. (``PMFS''), a 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-28
<PAGE> 84
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 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
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 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-29
<PAGE> 85
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-30
<PAGE> 86
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-31
<PAGE> 87
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++
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%+/++
Expenses, excluding distribution fees......................... 0.50% 0.53% 0.54% 0.38%+/++
Net investment income......................................... 3.21% 2.49% 3.29% 5.74%+/++
</TABLE>
- ---------------
* Commencement of investment operations.
+ Annualized.
++ 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-32
<PAGE> 88
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
IMPORTANT NOTICE FOR
CERTAIN SHAREHOLDERS
(UNAUDITED)
We are required by New York, California, Massachusetts and Oregon to inform
you that dividends which have been derived from interest on federal obligations
are not taxable to shareholders providing the mutual fund meets certain
requirements mandated by the respective state's taxing authorities. We are
pleased to report that 40% of the dividends paid by the Money Market Series*,
75.2% of the dividends paid by the Intermediate Term Series and 100% of the
dividends paid by the U.S. Treasury Money Market Series qualify for such
deduction.
Shortly after the close of the calendar year ended December 31, 1994, you
will be advised as to the federal tax status of the dividends you received in
calendar 1994.
For more detailed information regarding your state and local taxes, you
should contact your tax adviser or the state/local taxing authorities.
* Due to certain minimum portfolio holding requirements in California and New
York, residents of those states will not be able to exclude interest on Federal
obligations from state and local tax.
B-33
<PAGE> 89
LETTER TO
SHAREHOLDERS
April 3, 1995
Dear Shareholder:
In the past year, adjustable rate securities have felt the impact of a
series of seven interest rate increases. Yields have risen and some bond prices
have fallen drastically, but adjustable rate securities with short-term
maturities were resistant -- their prices aren't as sensitive to rising interest
rates since their coupons adjust periodically. We're pleased to report that the
Prudential Adjustable Rate Securities Fund has produced positive, above-average
total returns this year, as measured by Lipper Analytical Services, Inc.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
FUND PERFORMANCE
- --------------------------------------------------------------------------------
CUMULATIVE RETURNS AVERAGE ANNUAL RETURNS(1)
30-DAY AS OF 2/28/95 AS OF 3/31/95
SEC YIELD 1 YEAR SINCE INCEP. 1 YEAR SINCE INCEP.*
<S> <C> <C> <C> <C> <C>
Class A 4.7% 3.1% 7.4% 2.6% 2.4%
Class B 4.8% 3.0% 7.3% 2.6% 2.7%
Lipper Adj.
Rate* N/A -1.6% 3.7% N/A N/A
</TABLE>
Past performance is not indicative of future results. Principal and
investment return will fluctuate so that an investor's shares, when redeemed,
may be worth more or less than their original cost.
(1) Source: Prudential Mutual Fund Management Inc. and Lipper Analytical
Services Inc. The cumulative total returns do not take into account applicable
sales charges. The average annual returns do take into account applicable sales
charges. The Fund charges a maximum front-end sales load of 1% for Class A
shares and a contingent deferred sales charge of 1% (for redemptions in the
first year only) for Class B shares.
*Inception date: 6/10/92.
Note: Without expense subsidies and management fee waivers, the Fund's
1-year average annual total returns would have been 2.6% for Class A shares and
2.2% for Class B shares. The returns since inception would have been 2.3% and
1.6%, respectively. Subsidies and management fee waivers may be reduced or
terminated in the future.
-1-
<PAGE> 90
THE OBJECTIVE.
The Prudential Adjustable Rate Securities Fund seeks high current income
consistent with low volatility of principal. Of course, there is no assurance
the Fund will meet that objective. At least 65% of the portfolio is in
adjustable rate securities, mainly adjustable rate mortgages (ARMs), with the
rest in fixed-rate bonds. Under normal market conditions, 75% of the Fund's
assets are in bonds rated double-A or better by the credit rating services.
Currently, the Fund maintains a short-term effective maturity, similar to that
of the one-year Treasury note.
STRONGER GROWTH SPURRED RISING INTEREST RATES.
When the economy shifts into high gear as it has in the past year, bond
investors start to worry that inflation will follow and erode the value of their
returns. The Federal Reserve, which governs U.S. monetary policy, decided that
annualized growth of 6% in the fourth quarter of 1993 was too high for comfort;
they began last February to engineer a "soft landing" that would cool off growth
and dampen inflationary expectations without sending the economy into a
recession. Their primary tool? The federal funds target rate (the overnight
interbank lending rate), which was raised seven times to 6% at this writing from
3% at it's lowest in 1994.
The result? The Lehman Brothers Short-term Treasury Index rose a posted
0.5% in total return the past 12 months. Of course, long-term rates also rose
and investors in long-term government bonds really suffered, with losses of
7.7%, as reported by Lehman. The silver lining is that yields have risen and
the Fund's SEC-standardized 30-day yield on February 28, 1995 was 4.7% and 4.8%,
up from 3.5% and 3.6% for Class A and B, respectively, a year ago.
The Fund stood up well in this bearish bond market, producing a positive
total return of 2.6% for both Class A and Class B for the 12 months ended
3/31/95, the worst bond market in 75 years. This compares to the average fund
adjustable rate mortgage fund, which posted negative earnings for the year
according to Lipper Analytical Services Inc. The Fund is 3.5% above the average
ARM fund and 3% above the average U.S. government fund. We hope to continue this
trend.
A COUPLE GOOD DECISIONS HELPED PERFORMANCE.
As short-term interest rates rose, we restructured the portfolio in an
attempt to limit price volatility. Our strategy was the same throughout most of
the year: we raised cash, shifted to liquid bonds in the marketplace and
concentrated on ARMs with high coupons. These ARMs saw less of a price decline
since their high coupons became more desirable in a rising interest rate
environment.
-2-
<PAGE> 91
- - CASH. We kept about one-fifth of the Fund in short-term securities (17.9% at
2/28/95) compared to 10% as of 2/28/94. These short-term securities reduce the
Fund's average maturity and, of course, it's value does not react to interest
rates. Since short-term securities generate less income than long-term
securities, our 30-day SEC yield has not risen as much as market rates (120
basis points for the Fund, compared to 275 basis points for the federal funds
rate).
- - LIQUIDITY. When the markets are turbulent -- as they were for most of the
reporting period -- high-quality GNMA and FNMA securities are our favorite
bonds. We limited our holdings in privately-issued mortgages because their
yields were not sufficient to compensate us for additional risk.
The Constant Maturity Treasury Index. The portfolio is predominately in
adjustable rate mortgages, whose coupon adjustment is based on the Constant
Maturity Treasury (CMT) Index, because these securities have been priced to
produce the attractive yields in the adjustable rate mortgage market.
HIGHER RATES SHOULD SLOW GROWTH AND QUELL INFLATION FEARS.
Looking into the rest of 1995, we expect limited Federal Reserve action
and more investor-friendly markets. The rise in interest rates that created
havoc last year should result in moderate economic growth and keep inflationary
expectations in check. We think investors should look for moderate returns, in
line with historical averages -- in other words, expect to earn coupon income,
and possibly modest price gains.
We appreciate having you as a Prudential Adjustable Rate Securities Fund
shareholder and remain committed to managing the portfolio for your benefit.
SINCERELY,
/s/ LAWRENCE C. MCQUADE
- -------------------------
Lawrence C. McQuade
President
/s/ DAVID GRAHAM
- -------------------------
David Graham
Portfolio Manager
-3-
<PAGE> 92
PORTFOLIO Q&A
[FIGURE 1]
Dennis Bushe
Many investors avoided bond funds in the past year, fearing that rising
interest rates would erode their returns and add volatility to their investment
portfolio. If you are contemplating putting cash into the bond market -- in
taxable or tax-exempt securities -- you might want to consider some of the
following points. We talked with Prudential Mutual Funds chief fixed income
strategist Dennis Bushe about why bonds and bond mutual funds may make sense in
today's investment environment.
Q. WHY ARE BONDS AN ATTRACTIVE BUY RIGHT NOW?
A. First, bond prices corrected in 1994, which put interest rates at very
attractive levels in 1995. Second, real rates of return (the interest rate
minus the inflation rate) are still very high historically. According to
Ibbotson Associates, a nationally recognized investment analysis firm, the
annual inflation-adjusted return on bonds from 1926 to 1994 was between
2.5% and 3.0%. Today's investors receive over 4.5% in total
inflation-adjusted, annualized total return. Of course, these numbers are
just for illustration, but they show how much higher interest rates improve
bond total returns when inflation is only 2.7%, as measured by the Consumer
Price Index. And beating inflation is one primary goal of long-term
investing.
Q. WHY BUY A BOND FUND INSTEAD OF AN INDIVIDUAL BOND?
A. One of the biggest risks to bond investing is credit quality. Of course
you can avoid virtually all credit risk in a government bond fund, but some
investors need higher income than Uncle Sam provides. Bond funds help
manage this risk, and that may be especially important in 1995. First of
all, if the U.S. economy is beginning to slow down, as many economists
believe, then credit quality is a concern. A credit team becomes very
valuable, carefully selecting bonds in different sectors and industries for
bond portfolios. In addition, few individual investors have the resources
or clout to continually monitor companies, unearth possible credit problems
before they surface, and negotiate favorable terms with troubled issuers --
a bond fund does. Finally, the diversification of a bond fund may help
investors avoid wide price swings if one holding does experience financial
difficulties.
-4-
<PAGE> 93
PRUDENTIAL ADJUSTABLE RATE SECURITIES FUND, INC. PORTFOLIO OF INVESTMENTS
FEBRUARY 28, 1995
<TABLE>
<CAPTION>
- -------------------------------------------------------
PRINCIPAL
AMOUNT VALUE
(000) DESCRIPTION (NOTE 1)
- -------------------------------------------------------
<C> <S> <C>
LONG-TERM INVESTMENTS--71.6%
ADJUSTABLE RATE MORTGAGE
PASS-THROUGHS--71.6%
Federal Home Loan Mortgage
Corporation,
$ 9,794# 5.01%, 7/01/24.............. $ 9,779,057
8,065 5.03%, 8/01/24.............. 8,097,562
5,458 5.13%, 5/01/24.............. 5,413,207
97 7.14%, 10/01/23............. 99,617
29 7.38%, 7/01/22.............. 29,968
Federal National Mortgage
Association,
7,931 5.90%, 11/01/24............. 8,121,892
3,000 6.75%, 1/01/23.............. 3,057,188
Resolution Trust Corporation,
7,876 7.09%, 12/25/20............. 7,949,376
-----------
Total Adjustable Rate Mortgage
Pass-Throughs
(cost $42,225,353).......... 42,547,867
-----------
Total long-term investments
(cost $42,225,353).......... 42,547,867
-----------
SHORT-TERM INVESTMENTS--17.9%
ADJUSTABLE RATE MORTGAGE
PASS-THROUGHS--8.4%
Federal National Mortgage
Association,
$ 5,000 5.89%, 3/07/95
(cost $4,999,454)........... $ 5,000,000
-----------
CORPORATE BONDS--5.0%
Salomon Incorporated,
3,000 7.10%, 2/14/96
(cost $3,000,000)........... 2,991,750
-----------
REPURCHASE AGREEMENT--4.5%
Joint Repurchase Agreement
2,677 Account, 6.07%, 3/01/95
(cost $2,677,000; Note 5)... 2,677,000
-----------
Total short-term investments
(cost $10,676,454).......... 10,668,750
-----------
TOTAL INVESTMENTS--89.5%
(cost $52,901,807; Note 4).. 53,216,617
U.S. GOVERNMENT OBLIGATION
SOLD SHORT--(11.9)%
U.S. Treasury Note,
7,000 7.25%, 2/15/98
(proceeds $6,977,305)....... (7,066,710)
-----------
Total investments, net of
short sales--77.6%.......... 46,149,907
Other assets in excess of
liabilities--22.4%.......... 13,306,502
-----------
NET ASSETS--100%.............. $59,456,409
===========
</TABLE>
- ---------------
# Pledged as collateral on short sale.
See Notes to Financial Statements.
-5-
<PAGE> 94
- -------------------------------------------------------------------------------
PRUDENTIAL ADJUSTABLE RATE
SECURITIES FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS FEBRUARY 28, 1995
-----------------
<S> <C>
Investments, at value (cost
$52,901,807)................................................... $53,216,617
Cash........................................................... 4,907
Receivable for investments sold................................ 9,826,794
Receivable for investment sold short........................... 6,977,305
Interest receivable............................................ 548,912
Receivable for Fund shares sold................................ 2,020
Deferred expenses and other assets............................. 84,381
-----------
Total assets................................................. 70,660,936
-----------
LIABILITIES
Investment sold short, at value (proceeds $6,977,305).......... 7,066,710
Payable for investments purchased.............................. 3,080,898
Payable for Fund shares reacquired............................. 849,122
Accrued expenses............................................... 137,328
Dividends payable.............................................. 47,224
Due to Manager................................................. 23,245
-----------
Total liabilities............................................ 11,204,527
-----------
NET ASSETS..................................................... $59,456,409
===========
Net assets were comprised of:
Common stock, at par......................................... $ 6,222
Paid-in capital in excess of par............................. 68,231,556
-----------
68,237,778
Accumulated net realized loss on investments................. (9,006,774)
Net unrealized appreciation on investments................... 225,405
-----------
Net assets, February 28, 1995.............................. $59,456,409
===========
Class A:
Net asset value and redemption price per share
($58,709,948 / 6,144,443 shares of common stock issued and
outstanding)............................................... $9.55
Maximum sales charge (1.0% of offering price)................ .10
-----------
Maximum offering price to public............................. $9.65
-----------
Class B:
Net asset value, offering price and redemption price per
share ($746,461 / 77,858 shares of common stock issued
and outstanding)........................................... $9.59
===========
</TABLE>
See Notes to Financial Statements.
-6-
<PAGE> 95
- -----------------------------------------------------
PRUDENTIAL ADJUSTABLE RATE
SECURITIES FUND, INC.
STATEMENT OF OPERATIONS
- -----------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED
FEBRUARY 28,
NET INVESTMENT INCOME 1995
------------
<S> <C>
Income
Interest.............................. $ 4,299,982
------------
Expenses
Management fee........................ 456,738
Distribution fee--Class A, net of
waiver of $445,344.................. --
Distribution fee--Class B, net of
waiver of $22,789................... --
Custodian's fees and expenses......... 168,000
Registration fees..................... 84,000
Reports to shareholders............... 73,000
Directors' fees....................... 48,000
Transfer agent's fees and expenses.... 47,000
Amortization of deferred organization
expenses............................ 37,000
Audit fee............................. 34,000
Legal fees............................ 13,000
Insurance expense..................... 4,000
Miscellaneous......................... 9,640
------------
Total expenses...................... 974,378
------------
Net investment income................... 3,325,604
------------
REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS
Net realized gain (loss) on:
Investment transactions............... (2,250,608)
Short sales........................... 264,564
------------
(1,986,044)
------------
Net change in unrealized
appreciation/depreciation on:
Investments........................... 641,031
Short sales........................... (89,405)
------------
551,626
------------
Net loss on investments................. (1,434,418)
------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS............... $ 1,891,186
============
See Notes to Financial Statements.
</TABLE>
- --------------------------------------------------------
PRUDENTIAL ADJUSTABLE RATE
SECURITIES FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28,
INCREASE (DECREASE) IN ----------------------------
NET ASSETS 1995 1994
------------ -------------
<S> <C> <C>
Operations
Net investment income.... $ 3,325,604 $ 8,392,463
Net realized loss on
investment
transactions........... (1,986,044) (7,020,730)
Net change in unrealized
appreciation/depreciation
on investments......... 551,626 1,125,105
------------ -------------
Net increase in net
assets resulting from
operations............. 1,891,186 2,496,838
------------ -------------
Contingent deferred sales
charges rebated.......... -- 87,220
------------ -------------
Dividends and distributions
(Note 1)
Dividends to shareholders
from net investment
income
Class A................ (3,246,500) (7,557,640)
Class B................ (79,104) (834,823)
------------ -------------
(3,325,604) (8,392,463)
------------ -------------
Distributions to
shareholders in excess
of net investment
income
Class A................ (100,808) (262,362)
Class B................ (6,354) (28,982)
------------ -------------
(107,162) (291,344)
------------ -------------
Fund share transactions
(net of share
conversions) (Note 6)
Net proceeds from shares
sold................... 2,804,234 75,303,969
Net asset value of shares
issued to shareholders
in reinvestment of
dividends and
distributions.......... 2,778,067 6,959,698
Cost of shares
reacquired............... (72,756,688) (206,110,076)
------------ -------------
Decrease in net assets
from Fund share
transactions........... (67,174,387) (123,846,409)
------------ -------------
Total decrease............. (68,715,967) (129,946,158)
NET ASSETS
Beginning of year.......... 128,172,376 258,118,534
------------ -------------
End of year................ $ 59,456,409 $ 128,172,376
============ =============
</TABLE>
See Notes to Financial Statements.
-7-
<PAGE> 96
- --------------------------------------------------------------------------------
PRUDENTIAL ADJUSTABLE RATE SECURITIES FUND, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The Prudential Adjustable Rate Securities Fund, Inc. (the ``Fund'') is
registered under the Investment Company Act of 1940 as a diversified, open-end
management investment company. The Fund was incorporated in Maryland on December
23, 1991 and had no operations until the issuance of 5,000 shares of Class A
common stock and 5,000 shares of Class B common stock for $100,000 on May 1,
1992 to Prudential Mutual Fund Management, Inc. (``PMF''). Investment operations
commenced on June 10, 1992. The Fund's investment objective is high current
income consistent with low volatility of principal by investing primarily in
adjustable rate securities, including mortgage-backed securities issued or
guaranteed by private institutions or the U.S. Government, its agencies or
instrumentalities, asset-backed securities and corporate and other debt
obligations, which have interest rates which reset at periodic intervals.
NOTE 1. ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed by the
Fund in the preparation of its financial statements.
SECURITIES VALUATION: The Fund values portfolio securities on the basis of
current market quotations provided by dealers or by a pricing service approved
by the Board of Directors, which uses information such as quotations from
dealers, market transactions in comparable securities, various relationships
between securities and calculations on yield to maturity in determining values.
If market quotations are not readily available, a security is valued at fair
value as determined under procedures established by the Board of Directors.
Short-term securities which mature in more than 60 days are valued at
current market quotations. Short-term securities which mature in 60 days or less
are valued at amortized cost.
In connection with transactions in repurchase agreements, it is the Fund's
policy that its 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.
SHORT SALES: The Fund may sell a security it does not own in anticipation of a
decline in the market value of that security (short sale). When the Fund makes a
short sale, it must borrow the security sold short and deliver it to the
broker-dealer through which it made the short sale. The Fund may have to pay a
fee to borrow the particular security and may be obligated to pay over any
payments received on such borrowed securities. The Fund 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 Fund. A gain, limited to the price at which
the Fund sold the security short, or a loss, unlimited in magnitude, will be
recognized upon the termination of a short sale if the market price at
termination is less than or greater than, respectively, the proceeds originally
received.
SECURITIES TRANSACTIONS AND INVESTMENT INCOME: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of investments
are calculated on the identified cost basis. Interest income is recorded on the
accrual basis. The Fund amortizes premiums and discounts paid on purchases of
portfolio securities as adjustments to interest income.
Net investment income (other than distribution fees) and unrealized and
realized gains or losses are allocated daily to each class of shares based upon
the relative proportion of net assets of each class at the beginning of the day.
FEDERAL INCOME TAXES: It is the Fund's policy 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.
DIVIDENDS AND DISTRIBUTIONS: The Fund declares daily and pays dividends monthly
from net investment income. Net capital gains, if any, will be distributed at
least annually. Dividends and distributions are recorded on the ex-dividend
date. Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles. These differences are primarily due to dividends in
excess of net investment income.
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 year ended February 28, 1995, the Fund reclassed $208,058 of
dividends
-8-
<PAGE> 97
in excess of net investment income to paid-in capital from accumulated
distributions in excess of net investment income. Net investment income, net
realized gains and net assets were not affected by this change.
DEFERRED ORGANIZATION EXPENSES: Approximately $162,000 of expenses were incurred
in connection with the organization of the Fund. These costs have been deferred
and are being amortized ratably over a period of sixty months from the date the
Fund commenced investment operations.
NOTE 2. AGREEMENTS
The Fund has a management agreement with PMF. Pursuant to this agreement,
PMF has responsibility for all investment advisory services and supervises the
subadviser's performance of such services. PMF has entered into a subadvisory
agreement with The Prudential Investment Corporation (``PIC''). PIC furnishes
investment advisory services in connection with the management of the Fund. PMF
pays for the services of PIC, the cost of compensation of officers of the Fund,
occupancy and certain clerical and bookkeeping costs of the Fund. The Fund bears
all other costs and expenses.
The management fee paid PMF is computed daily and payable monthly, at an
annual rate of .50 of 1% of the average daily net assets of the Fund.
The Fund has distribution agreements with Prudential Mutual Fund
Distributors, Inc. (``PMFD''), which acts as the distributor of the Class A
shares of the Fund, and with Prudential Securities Incorporated (``PSI'') which
acts as distributor of the Class B shares of the Fund (collectively the
``Distributors''). To reimburse the Distributors for their expenses incurred in
distributing and servicing the Fund's Class A and B shares, the Fund, pursuant
to plans of distribution, pays the Distributors a reimbursement, accrued daily
and payable monthly.
Pursuant to the Class A Plan, the Fund may reimburse PMFD for its expenses
with respect to Class A shares, at an annual rate of up to .50 of 1% of the
average daily net asset value of the Class A shares. PMFD pays various
broker-dealers, including PSI and Pruco Securities Corporation (``Prusec''),
affiliated broker-dealers, for account servicing fees and other expenses
incurred by such broker-dealers. PMFD has waived, temporarily and voluntarily,
all payments to it under the Class A Plan. The amount of fees waived for the
year ended February 28, 1995, amounted to $445,344 ($.05 per Class A share; .50%
of Class A average net assets).
Pursuant to the Class B Plan, the Fund reimburses PSI for its
distribution-related expenses with respect to Class B shares at an annual rate
of up to 1% of the average daily net assets of the Class B shares. PSI has
waived, temporarily and voluntarily, all payments to it under the Class B Plan.
The amount of fees waived for the year ended February 28, 1995 amounted to
$22,789 ($.10 per Class B share; 1.00% of Class B average net assets).
The Class B distribution expenses include commission credits for payments
of commissions and account servicing fees to financial advisers and an
allocation for overhead and other distribution-related expenses, interest and/or
carrying charges, the cost of printing and mailing prospectuses to potential
investors and of advertising incurred in connection with the distribution of
shares.
PMFD has advised the Fund that it has received approximately $1,900 in
front-end sales charges resulting from sales of Class A shares during the fiscal
year ended February 28, 1995. From these fees, PMFD paid such sales charges to
dealers (PSI and Prusec) which in turn paid commissions to salespersons.
With respect to the Class B Plan, at any given time, the amount of expenses
incurred by PSI in distributing the Fund's shares and not recovered through the
imposition of contingent deferred sales charges in connection with certain
redemptions of shares may exceed the total payment made by the Fund pursuant to
the Class B Plan. PSI advised the Fund that for the year ended February 28,
1995, it received approximately $5,000 in contingent deferred sales charges
imposed upon certain redemptions by investors. PSI, as distributor, has also
advised the Fund that at February 28, 1995, the amount of distribution expenses
incurred by PSI and not yet reimbursed by the Fund or recovered through
contingent deferred sales charges approximated $9,100. This amount may be
recovered through future payments under the Class B Plan or contingent deferred
sales charges.
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 fiscal year ended February
28, 1995, the Fund incurred fees of approximately $38,000 for the services of
PMFS. As of February 28, 1995, approximately $2,400 of such fees were due to
PMFS. Transfer agent fees and expenses in the Statement of Operations include
certain out-of-pocket expenses paid to non-affiliates.
NOTE 4. PORTFOLIO SECURITIES
Purchases and sales of investment securities, other than short-term
investments, for
-9-
<PAGE> 98
the fiscal year ended February 28, 1995 were $224,246,307 and $286,453,845,
respectively.
The federal income tax basis of the Fund's investments at February 28, 1995
was substantially the same as the basis for financial reporting and,
accordingly, net unrealized depreciation for federal income tax purposes was
$314,810 (gross unrealized appreciation--$385,697; gross unrealized
depreciation--$70,887).
For federal income tax purposes, the Fund has a capital loss carryforward
as of February 28, 1995 of approximately $8,597,700 of which $3,282,600 expires
in 2002 and $5,315,100 expires in 2003. Accordingly, no capital gains
distribution is expected to be paid to shareholders until net gains have been
realized in excess of such carryforward.
The Fund will elect to treat net capital losses of approximately $409,000
incurred in the four month period ended February 28, 1995 as having been
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 February 28, 1995, the
Fund has a 0.33% undivided interest in the repurchase agreements in the joint
account. The undivided interest for the Fund represents $2,677,000 in the
principal amount. As of such date, each repurchase agreement in the joint
account and the collateral therefor were as follows:
Goldman, Sachs & Co., 6.08%, in the principal amount of $250,000,000,
repurchase price $250,042,222, due 3/1/95. The value of the collateral including
accrued interest is $255,043,078.
Bear, Stearns & Co., 6.07%, in the principal amount of $250,000,000,
repurchase price $250,042,153, due 3/1/95. The value of the collateral including
accrued interest is $255,223,281.
Barclays de Zoete Wedd Securities, Inc., 6.08%, in the principal amount of
$60,000,000, repurchase price $60,010,133, due 3/1/95. The value of the
collateral including accrued interest is $61,200,060.
Smith Barney Inc., 6.06%, in the principal amount of $250,000,000,
repurchase price $250,042,083 due 3/1/95. The value of the collateral including
accrued interest is $255,000,305.
NOTE 6. CAPITAL
The Fund offers both Class A and Class B shares. Class A shares are sold with a
front-end sales charge of up to 1.0%. Class B shares are sold with a contingent
deferred sales charge of 1.0% if they are redeemed within one year of purchase.
Class B shares will be automatically converted into Class A shares after the
one-year contingent deferred sales charge period has expired. Both classes of
shares have equal rights as to earnings, assets and voting privileges except
that each class bears different distribution expenses and has exclusive voting
rights with respect to its distribution plan.
There are 2 billion authorized shares of $.001 par value common stock
divided into two classes, designated Class A and Class B common stock, each of
which consists of 1 billion authorized shares. Of the 6,222,301 shares issued
and outstanding at February 28, 1995, PMF owned 10,015 Class A shares.
-10-
<PAGE> 99
Transactions in shares of common stock were as follows:
<TABLE>
<CAPTION>
Class A SHARES AMOUNT
- ------- ---------------- -------------
<S> <C> <C>
Year ended February 28, 1995:
Shares sold.................... 228,976 $ 2,205,352
Shares issued in reinvestment
of distributions............. 285,589 2,710,958
Shares reacquired.............. (7,570,166) (71,826,463)
---------------- -------------
Net decrease in shares
outstanding before
conversion................... (7,055,601) (66,910,153)
Shares issued upon conversion
from Class B................. 447,807 4,242,531
---------------- -------------
Net decrease in shares
outstanding.................. (6,607,794) $ (62,667,622)
================ =============
Year ended February 28, 1994:
Shares sold.................... 3,885,604 $ 38,096,534
Shares issued in reinvestment
of distributions............. 643,966 6,301,453
Shares reacquired.............. (17,047,153) (166,644,600)
---------------- -------------
Net decrease in shares
outstanding before
conversion................... (12,517,583) $(122,246,613)
Shares issued upon conversion
from Class B................. 3,195,365 31,329,562
---------------- -------------
Net decrease in shares
outstanding.................. (9,322,218) $ (90,917,051)
================ =============
<CAPTION>
Class B
- --------
<S> <C> <C>
Year ended February 28, 1995:
Shares sold.................... 62,621 $ 598,882
Shares issued in reinvestment
of distributions............. 7,031 67,109
Shares reacquired.............. (95,108) (930,225)
---------------- -------------
Net decrease in shares
outstanding before
conversion................... (25,456) (264,234)
Shares reacquired upon
conversion into Class A...... (446,322) (4,242,531)
---------------- -------------
Net decrease in shares
outstanding.................. (471,778) $ (4,506,765)
================ =============
Year ended February 28, 1994:
Shares sold.................... 597,901 $ 5,877,873
Shares issued in reinvestment
of distributions............. 66,872 658,245
Shares reacquired.............. (827,247) (8,135,914)
---------------- -------------
Net decrease in shares
outstanding before
conversion................... (162,474) (1,599,796)
Shares reacquired upon
conversion into Class A...... (3,188,039) (31,329,562)
---------------- -------------
Net decrease in shares
outstanding.................. (3,350,513) $ (32,929,358)
================ =============
</TABLE>
-11-
<PAGE> 100
PRUDENTIAL ADJUSTABLE RATE SECURITIES FUND, INC.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
CLASS A CLASS B
------------------------------------------ -------------------------------------------
JUNE 10, JUNE 10,
YEAR YEAR 1992* YEAR YEAR 1992*
ENDED ENDED THROUGH ENDED ENDED THROUGH
FEBRUARY 28, FEBRUARY 28, FEBRUARY 28, FEBRUARY 28, FEBRUARY 28, FEBRUARY 28,
1995 1994 1993 1995 1994 1993
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.... $ 9.63 $ 9.94 $ 10.00 $ 9.67 $ 9.94 $ 10.00
------------ ------------ ------------ ------------ ------------ ------------
INCOME FROM INVESTMENT OPERATIONS
Net investment income+.................. .36 0.41 0.35 .360 .41 0.31
Net realized and unrealized loss on
investment transactions............... (.07) (0.29) (0.05) (.08) (0.29) (0.05)
------------ ------------ ------------ ------------ ------------ ------------
Total from investment operations...... .29 0.12 0.30 .28 0.12 0.26
LESS DISTRIBUTIONS
Dividends from net investment income.... (.35) (0.41) (0.35) (.33) (0.41) (0.31)
Distributions in excess of net
investment income..................... (.01) (0.02) (0.01) (.03) (0.01) (0.01)
------------ ------------ ------------ ------------ ------------ ------------
Total distributions................... (.36) (0.43) (0.36) (.36) (0.42) (0.32)
------------ ------------ ------------ ------------ ------------ ------------
Contingent deferred sales charges
rebated............................... -- -- -- -- .03 --
------------ ------------ ------------ ------------ ------------ ------------
Net asset value, end of period.......... $ 9.56 $ 9.63 $9.94 $ 9.59 $ 9.67 $ 9.94
============ ============ ============ ============ ============ ============
TOTAL RETURN#........................... 3.07% 1.24% 2.92% 2.96% 1.58% 2.56%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)......... $58,710 $122,860 $219,352 $746 $5,312 $38,766
Average net assets (000)................ $89,069 $176,863 $217,329 $2,279 $19,742 $33,895
Ratios to average net assets:+
Expenses, including distribution
fees.................................. 1.07% 0.69% 0.77%** 1.03% 0.75% 1.27%**
Expenses, excluding distribution
fees.................................. 1.07% 0.63% 0.27%** 1.03% 0.63% 0.27%**
Net investment income................. 3.65% 4.29% 4.81%** 3.47% 4.23% 4.31%**
Portfolio turnover rate................. 268% 130% 45% 268% 130% 45%
</TABLE>
- ---------------
* Commencement of investment operations.
** Annualized.
+ Net of management fee and/or distribution fee waivers.
# Total return does not consider the effect of sales loads. Total return
is calculated assuming a purchase of shares on the first day and a sale
on the last day of each period reported and includes reinvestments of
dividends and distributions. Total returns for periods of less than a
full year are not annualized.
See Notes to Financial Statements.
-12-
<PAGE> 101
- --------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
The Shareholders and Board of Directors
Prudential Adjustable Rate Securities Fund, Inc.
We have audited the accompanying statement of assets and liabilities of
Prudential Adjustable Rate Securities Fund, Inc., including the portfolio of
investments, as of February 28, 1995, the related statements of operations for
the year then ended and of changes in net assets for each of the two years in
the period then ended and the financial highlights for each of the two years in
the period then ended and for the period June 10, 1992 (commencement of
operations) to February 28, 1993. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at February
28, 1995 by correspondence with the custodian and brokers; where replies were
not received from brokers, we performed other auditing procedures. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Prudential
Adjustable Rate Securities Fund, Inc. at February 28, 1995, the results of its
operations, the changes in its net assets and the financial highlights for the
respective stated periods, in conformity with generally accepted accounting
principles.
Deloitte & Touche LLP
New York, New York
April 13, 1995
-13-
<PAGE> 102
PRUDENTIAL ADJUSTABLE RATE SECURITIES FUND
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN
PRUDENTIAL ADJUSTABLE RATE SECURITIES FUND AND
THE LEHMAN BROS 1-3 YEAR GOV'T. INDEX
[FIGURE 2]
[FIGURE 3]
Past performance is not predictive of future performance and an investor's
shares may be worth more or less than their original cost.
These graphs are furnished to you in accordance with SEC regulations. They
compare a $10.00 investment in Prudential Adjustable Rate Securities Fund (Class
A and Class B) with a similar investment in the Lehman Bros. 1-3 Year Government
Index (Lehman Government Index) by portraying the initial account values at the
commencement of operations of each class and subsequent account values at the
end of each fiscal year (February 28), as measured of a quarterly basis,
beginning in 1992. For purposes of the graphs and, unless otherwise indicated,
the accompanying tables, it has been assumed that (a) the maximum sales charge
was deducted from the initial $10.00 investment in Class A shares; (b) Class B
shares converted into Class A shares on July 1, 1993 and the graph demonstrates
the performance of Class A shares since that date; (c) all recurring fees
(including management fees) were deducted; and (d) all dividends and
distributions were reinvested.
The Lehman Government Index is a weighted index comprised of securities issued
or backed by the U.S. government and its agencies with a remaining maturity of
one to three years. The Lehman Government Index is an unmanaged index and
includes the reinvestment of all dividends, but does not reflect the payment of
transaction costs and advisory fees associated with an investment in the Fund.
The securities which comprise the Lehman Government Index may differ
substantially from he securities in the Fund's portfolio. The Lehman
Government Index is not the only index that may be used to characterize
performance of adjustable rate security funds and other indices may portray
different comparative performance.
<PAGE> 103
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 Advisor or Pruco Securities Representative or telephone the Funds 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.
(formerly known as Prudential Government Plus Fund)
Prudential Government Securities Trust
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
(formerly known as Prudential FlexiFund)
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 Strategist Fund, Inc.
(formerly known as Prudential Growth Fund)
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
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
<PAGE> 104
DIRECTORS
Edward D. Beach
Delayne Dedrick Gold
Harry A. Jacobs, Jr.
Lawrence C. McQuade
Thomas T. Mooney
Thomas H. O'Brien
Thomas A. Owens, Jr.
Richard A. Redeker
Stanley E. Shirk
OFFICERS
Lawrence C. McQuade, President
Robert F. Gunia, Vice President
Susan C. Cote, Treasurer
S. Jane Rose, Secretary
Deborah A. Docs, Assistant Secretary
MANAGER
Prudential Mutual Fund Management, Inc.
One Seaport Plaza
New York, NY 10292
INVESTMENT ADVISER
Prudential Investment Corporation
Prudential Plaza
Newark, NJ 07101
DISTRIBUTORS
Prudential Mutual Fund Distributors, Inc.
Prudential Securities Incorporated
One Seaport Plaza
New York, NY 10292
CUSTODIAN
State Street Bank and Trust Company
One Heritage Drive
North Quincy, MA 02171
TRANSFER AGENT
Prudential Mutual Fund Services, Inc.
P.O. Box 15005
New Brunswick, NJ 08906
INDEPENDENT ACCOUNTANTS
Deloitte & Touche LLP
Two World Financial Center
New York, NY 10281
LEGAL COUNSEL
Shereff, Friedman, Hoffman & Goodman
919 Third Avenue
New York, NY 10022
PRUDENTIAL MUTUAL FUNDS
ONE SEAPORT PLAZA
NEW YORK, NY 10292
TOLL FREE (800) 225-1852, COLLECT (908) 417-7555
This report is not authorized for distribution to prospective investors unless
preceded or accompanied by a current prospectus.
74429J106 MF156E
74429J205 [LOGO] Cat. #444591Z
PRUDENTIAL
ADJUSTABLE RATE
SECURITIES
FUND, INC.
----------
[FIGURE 4]
PRUDENTIAL MUTUAL FUNDS
BUILDING YOUR FUTURE [LOGO]
ON OUR STRENGTH(SM)
ANNUAL REPORT
FEBRUARY 28, 1995
<PAGE> 105
PART C
OTHER INFORMATION
ITEM 15. INDEMNIFICATION.
As permitted by Section 17(h) and (i) of the Investment Company Act of 1940
(the "Investment Company Act") and pursuant to Article VII of the Fund's By-Laws
(Exhibit 2 to the Registration Statement), officers, directors, employees and
agents of the Trust may be indemnified against certain liabilities in connection
with the Trust, and pursuant to Section 6 of the Distribution Agreements
(Exhibits 6(a) and 6(b) to the Registration Statement), Prudential Securities
Incorporated and Prudential Mutual Fund Distributors, Inc., as distributors of
the Trust, may be indemnified against certain liabilities which they may incur.
Such Article VII of the By-Laws, as amended and Section 6 of the Distribution
Agreements are hereby incorporated by reference in their entirety.
The Trust has purchased an insurance policy insuring its officers and
trustees against certain liabilities, and certain costs of defending claims
against such officers and trustees, to the extent such officers and trustees are
not found to have committed conduct constituting willful misfeasance, bad faith,
gross negligence or reckless disregard in the performance of their duties. The
insurance policy also insures the Trust against the cost of indemnification
payments to officers and trustees under certain circumstances.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to trustees, officers and controlling persons of the
Registrant and the principal underwriter pursuant to the foregoing provisions or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a trustee, officer, or controlling
person of the Registrant and the principal underwriter in connection with the
successful defense of any action, suit or proceeding) is asserted against the
Registrant by such trustee, officer or controlling person or the principal
underwriter in connection with the shares being registered, the Registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
The Registrant hereby undertakes that it will apply the indemnification
provisions of its By-Laws in a manner consistent with Release No. 11330 of the
Securities and Exchange Commission under the Investment Company Act of 1940 so
long as the interpretations of Sections 17(h) and 17(i) of such Act remain in
effect and are consistently applied.
ITEM 16. EXHIBITS.
<TABLE>
<C> <S>
1. (a) Declaration of Trust, as amended and restated on September 6, 1988, of the
Registrant. Incorporated by reference to Exhibit 1 to Post-Effective Amendment No. 5
to the Registration Statement on Form N-1A (File No. 2-74139).
(b) Amendment to Declaration of Trust, dated March 1, 1991. Incorporated by reference
to Exhibit No. 1(b) to Post-Effective Amendment No. 16 to the Registration Statement
on Form N-1A (File No. 2-74139).
2. By-Laws of the Registrant. Incorporated by reference to Exhibit No. 2 to
Pre-Effective Amendment No. 1 to the Registration Statement on Form N-1A (File No.
2-74139).
4. Plan of Reorganization, filed herewith as Appendix B to the Prospectus and Proxy
Statement.*
5. (a) Specimen certificate for shares of beneficial interest issued by the Registrant.
Incorporated by reference to Exhibit No. 4 to Post-Effective Amendment No. 12 to the
Registration Statement on Form N-1A (File No. 2-74139).
</TABLE>
C-1
<PAGE> 106
<TABLE>
<C> <S>
(b) Specimen certificate for shares of beneficial interest issued by the Registrant's
U.S. Treasury Money Market Series. Incorporated by reference to Exhibit No. 4(b) to
Post-Effective Amendment No. 16 to the Registration Statement on Form N-1A (File No.
2-74139).
(c) Instruments defining rights of holders of the securities being offered.
Incorporated by reference to Exhibit 4(c) to Post-Effective Amendment No. 19 to the
Registration Statement filed on Form N-1A via EDGAR on January 27, 1994 (File No.
2-74139).
6. (a) Management Agreement dated August 9, 1988, as amended on November 19, 1993,
between the Registrant and Prudential Mutual Fund Management, Inc. Incorporated by
reference to Exhibit 5(a) to Post-Effective Amendment No. 19 to the Registration
Statement filed on Form N-1A via EDGAR on January 27, 1994 (File No. 2-74139).
(b) Subadvisory Agreement dated August 9, 1988, between Prudential Mutual Fund
Management, Inc. and The Prudential Investment Corporation. Incorporated by reference
to Exhibit No. 5(b) to Post-Effective Amendment No. 13 to the Registration Statement
on Form N-1A (File No. 2-74139).
7. (a) Distribution and Service Agreement.*
9. Custodian Agreement between the Registrant and State Street Bank and Trust Company.
Incorporated by reference to Exhibit No. 8 to the Registration Statement on Form N-1A
(File No. 2-74139).
10. (a) Distribution and Service Plan pursuant to Rule 12b-1 as amended on July 1, 1993
for the Intermediate Term Series. Incorporated by reference to Exhibit 15(a) to
Post-Effective Amendment No. 19 to the Registration Statement filed on Form N-1A via
EDGAR on January 27, 1994 (File No. 2-74139).
(b) Distribution and Service Plan pursuant to Rule 12b-1 as amended on July 1, 1993
for the Money Market Series. Incorporated by reference to Exhibit 15(b) to
Post-Effective Amendment No. 19 to the Registration Statement filed on Form N-1A via
EDGAR on January 27, 1994 (File No. 2-74139).
11. Opinion of Counsel.*
12. Tax Opinion of Counsel.*
13. Purchase Agreement incorporated by reference to Exhibit No. 13 to Pre-Effective
Amendment No. 1 to the Registration Statement on Form N-1A (File No. 2-74139).
14. Consent of Independent Accountants.
(a) Deloitte & Touche LLP*
(b) Price Waterhouse LLP*
17. (a) Proxy.
(b) Proxy insert card.*
(c) Letter to shareholders.*
(d) Copy of Registrant's declaration pursuant to Rule 24f-2 under the 1940 Act.*
(e) Prospectus of Intermediate Series dated April 3, 1995.*
(f) Form of Prospectus of Adjustable Rate Fund dated June , 1995.*
</TABLE>
- ------------
*Filed herewith.
C-2
<PAGE> 107
ITEM 17. UNDERTAKINGS
(1) The undersigned registrant agrees that prior to any public reoffering
of the securities registered through the use of a prospectus which is a part of
this registration statement by any person or party who is deemed to be an
underwriter within the meaning of Rule 145(c) of the Securities Act, the
reoffering prospectus will contain the information called for by the applicable
registration form for reofferings by persons who may be deemed underwriters, in
addition to the information called for by the other items of the applicable
form.
(2) The undersigned registrant agrees that every prospectus that is filed
under paragraph (1) above will be filed as a part of an amendment to the
registration statement and will not be used until the amendment is effective,
and that, in determining any liability under the 1933 Act, each post-effective
amendment shall be deemed to be a new registration statement for the securities
offered therein, and the offering of the securities at that time shall be deemed
to be the initial bona fide offering of them.
C-3
<PAGE> 108
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed on behalf of the Registrant by the
undersigned, thereunto duly authorized, in the City of New York, and State of
New York, on the 6th day of June, 1995.
PRUDENTIAL GOVERNMENT SECURITIES TRUST
/s/ RICHARD A. REDEKER
------------------------------------------
(Richard A. Redeker, President)
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ ------------------------ -------------
<S> <C> <C>
/s/ EUGENE S. STARK Treasurer and June 6, 1995
- ------------------------------------------ Principal Financial and
Eugene S. Stark Accounting Officer
/s/ DELAYNE DEDRICK GOLD Trustee June 6, 1995
- ------------------------------------------
Delayne Dedrick Gold
/s/ ARTHUR HAUSPURG Trustee June 6, 1995
- ------------------------------------------
Arthur Hauspurg
/s/ STEPHEN P. MUNN Trustee June 6, 1995
- ------------------------------------------
Stephen P. Munn
/s/ LOUIS A. WEIL, III Trustee June 6, 1995
- ------------------------------------------
Louis A. Weil, III
/s/ RICHARD A. REDEKER President June 6, 1995
- ------------------------------------------
Richard A. Redeker
</TABLE>
C-4
<PAGE> 109
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER EXHIBITS PAGE
- ------ -------------------------------------------------------------------------- ----------
<C> <S> <C>
1. (a) Declaration of Trust, as amended and restated on September 6, 1988, of
the Registrant. Incorporated by reference to Exhibit 1 to Post-Effective
Amendment No. 5 to the Registration Statement on Form N-1A (File No.
2-74139).
(b) Amendment to Declaration of Trust, dated March 1, 1991. Incorporated
by reference to Exhibit No. 1(b) to Post-Effective Amendment No. 16 to the
Registration Statement on Form N-1A (File No. 2-74139).
2. By-Laws of the Registrant. Incorporated by reference to Exhibit No. 2 to
Pre-Effective Amendment No. 1 to the Registration Statement on Form N-1A
(File No. 2-74139).
4. Plan of Reorganization, filed herewith as Appendix B to the Prospectus and
Proxy Statement.*
5. (a) Specimen certificate for shares of beneficial interest issued by the
Registrant. Incorporated by reference to Exhibit No. 4 to Post-Effective
Amendment No. 12 to the Registration Statement on Form N-1A (File No.
2-74139).
(b) Specimen certificate for shares of beneficial interest issued by the
Registrant's U.S. Treasury Money Market Series. Incorporated by reference
to Exhibit No. 4(b) to Post-Effective Amendment No. 16 to the Registration
Statement on Form N-1A (File No. 2-74139).
(c) Instruments defining rights of holders of the securities being
offered. Incorporated by reference to Exhibit 4(c) to Post-Effective
Amendment No. 19 to the Registration Statement filed on Form N-1A via
EDGAR on January 27, 1994 (File No. 2-74139).
6. (a) Management Agreement dated August 9, 1988, as amended on November 19,
1993, between the Registrant and Prudential Mutual Fund Management, Inc.
Incorporated by reference to Exhibit 5(a) to Post-Effective Amendment No.
19 to the Registration Statement filed on Form N-1A via EDGAR on January
27, 1994 (File No. 2-74139).
(b) Subadvisory Agreement dated August 9, 1988, between Prudential Mutual
Fund Management, Inc. and The Prudential Investment Corporation.
Incorporated by reference to Exhibit No. 5(b) to Post-Effective Amendment
No. 13 to the Registration Statement on Form N-1A (File No. 2-74139).
7. (a) Distribution and Service Agreement.*
9. Custodian Agreement between the Registrant and State Street Bank and Trust
Company. Incorporated by reference to Exhibit No. 8 to the Registration
Statement on Form N-1A (File No. 2-74139).
10. (a) Distribution and Service Plan pursuant to Rule 12b-1 as amended on
July 1, 1993 for the Intermediate Term Series. Incorporated by reference
to Exhibit 15(a) to Post-Effective Amendment No. 19 to the Registration
Statement filed on Form N-1A via EDGAR on January 27, 1994 (File No.
2-74139).
(b) Distribution and Service Plan pursuant to Rule 12b-1 as amended on
July 1, 1993 for the Money Market Series. Incorporated by reference to
Exhibit 15(b) to Post-Effective Amendment No. 19 to the Registration
Statement filed on Form N-1A via EDGAR on January 27, 1994 (File No.
2-74139).
11. Opinion of Counsel.*
12. Tax Opinion of Counsel.*
</TABLE>
<PAGE> 110
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER EXHIBITS PAGE
- ------ -------------------------------------------------------------------------- ----------
<C> <S> <C>
13. Purchase Agreement incorporated by reference to Exhibit No. 13 to
Pre-Effective Amendment No. 1 to the Registration Statement on Form N-1A
(File No. 2-74139).
14. Consent of Independent Accountants.
(a) Deloitte & Touche LLP*
(b) Price Waterhouse LLP*
17. (a) Proxy.*
(b) Proxy insert card.*
(c) Letter to shareholders.*
(d) Copy of Registrant's declaration pursuant to Rule 24f-2 under the 1940
Act.*
(e) Prospectus of Intermediate Series dated April 3, 1995, as
supplemented.*
(f) Form of Prospectus of Adjustable Rate Fund dated June , 1995.*
</TABLE>
- ------------
*Filed herewith.
<PAGE> 1
EXHIBIT 7(a)
PRUDENTIAL GOVERNMENT SECURITIES TRUST
(INTERMEDIATE TERM SERIES)
Distribution Agreement
Agreement made as of July 23, 1982, as amended on October 26, 1984 and
June 26, 1985 and as amended and restated on August 9, 1988, July 1, 1993 and
May 2, 1995, between Prudential Government Securities Trust a Massachusetts
business trust (the Fund) and Prudential Securities Incorporated, a Delaware
Corporation (the Distributor).
WITNESSETH
WHEREAS, the Fund is registered under the Investment Company Act of
1940, as amended (the Investment Company Act), as a diversified, open-end,
management investment company and it is in the interest of the Fund to offer
its shares for sale continuously;
WHEREAS, shares of beneficial interest of the Fund are currently
divided into three separate series, one of which is the Intermediate Term
Series (the Series).
WHEREAS, the Distributor is a broker-dealer registered under the
Securities Exchange Act of 1934, as amended, and is engaged in the business of
selling shares of registered investment companies either directly or through
other broker-dealers;
WHEREAS, the Fund and the Distributor wish to enter into an agreement
with each other, with respect to the continuous offering of the shares of the
Series from and after the date hereof in order to promote the growth of the
Series and facilitate the distribution of its shares; and
WHEREAS, the Fund has adopted a distribution and service plan pursuant
to Rule 12b-1 under the Investment Company Act (the Plan) authorizing payments
by the Fund to the Distributor with respect to the distribution of shares of
the Series and the maintenance of shareholder accounts.
NOW, THEREFORE, the parties agree as follows:
Section 1. Appointment of the Distributor
The Fund hereby appoints the Distributor as the principal underwriter
and distributor of the Series to sell shares of the Series to the public on
behalf of the Fund and the Distributor hereby accepts such appointment and
agrees to act hereunder. The Fund hereby agrees during the term of this
Agreement to sell shares of the Series through the Distributor on the terms and
conditions set forth below.
<PAGE> 2
Section 2. Exclusive Nature of Duties
The Distributor shall be the exclusive representative of the Series to
act as principal underwriter and distributor, except that:
2.1 The exclusive rights granted to the Distributor to sell shares of
the Series shall not apply to shares of the Series issued in connection with
the merger or consolidation of any other investment company or personal holding
company with the Fund or the acquisition by purchase or otherwise of all (or
substantially all) the assets or the outstanding shares of any such company by
the Fund.
2.2 Such exclusive rights shall not apply to shares of the Series
issued by the Fund pursuant to reinvestment of dividends or capital gains
distributions.
2.3 Such exclusive rights shall not apply to shares of the Series
issued by the Fund pursuant to the reinstatement privilege afforded redeeming
shareholders.
2.4 Such exclusive rights shall not apply to purchases made through
the Fund's transfer and dividend disbursing agent in the manner set forth in
the currently effective Prospectus of the Series. The term "Prospectus" shall
mean the Prospectus and Statement of Additional Information included as part of
the Fund's Registration Statement, as such Prospectus and Statement of
Additional Information may be amended or supplemented from time to time, and
the term "Registration Statement" shall mean the Registration Statement filed
by the Fund with the Securities and Exchange Commission and effective under the
Securities Act of 1933, as amended (the Securities Act), and the Investment
Company Act, as such Registration Statement is amended from time to time.
Section 3. Purchase of Shares from the Fund
3.1 The Distributor shall have the right to buy from the Fund on
behalf of investors the shares of the Series needed, but not more than the
shares needed (except for clerical errors in transmission) to fill
unconditional orders for shares placed with the Distributor by investors or
registered and qualified securities dealers and other financial institutions
(selected dealers).
3.2 The shares of the Series shall be sold by the Distributor on
behalf of the Fund and delivered by the Distributor or selected dealers, as
described in Section 6.4 hereof, to investors at the offering price as set
forth in the Prospectus.
3.3 The Fund shall have the right to suspend the sale of shares of
the Series at times when redemption is suspended pursuant to the conditions in
Section 4.3 hereof or at such other times as
2
<PAGE> 3
may be determined by the Trustees. The Fund shall also have the right to
suspend the sale of shares the Series if a banking moratorium shall have been
declared by federal or New York authorities.
3.4 The Fund, or any agent of the Fund designated in writing by the
Fund, shall be promptly advised of all purchase orders for shares of the Series
received by the Distributor. Any order may be rejected by the Fund; provided,
however, that the Fund will not arbitrarily or without reasonable cause refuse
to accept or confirm orders for the purchase of shares of the Series. The Fund
(or its agent) will confirm orders upon their receipt, will make appropriate
book entries and upon receipt by the Fund (or its agent) of payment therefor,
will deliver deposit receipts for such shares of the Series pursuant to the
instructions of the Distributor. Payment shall be made to the Fund in New York
Clearing House funds or federal funds. The Distributor agrees to cause such
payment and such instructions to be delivered promptly to the Fund (or its
agent).
Section 4. Repurchase or Redemption of Shares by the Fund
4.1 Any of the outstanding shares of the Series may be tendered for
redemption at any time, and the Fund agrees to repurchase or redeem the shares
so tendered in accordance with its Articles of Incorporation as amended from
time to time, and in accordance with the applicable provisions of the
Prospectus. The price to be paid to redeem or repurchase the shares of the
Series shall be equal to the net asset value determined as set forth in the
Prospectus. All payments by the Fund hereunder shall be made in the manner set
forth in Section 4.2 below.
4.2 The Fund shall pay the total amount of the redemption price as
defined in the above paragraph pursuant to the instructions of the Distributor
on or before the seventh day subsequent to its having received the notice of
redemption in proper form. The proceeds of any redemption of shares of the
Series shall be paid by the Fund or for the account of the redeeming
shareholder, in each case in accordance with applicable provisions of the
Prospectus.
4.3 Redemption of shares of the Series or payment may be suspended at
times when the New York Stock Exchange is closed for other than customary
weekends and holidays, when trading on said Exchange is restricted, when an
emergency exists as a result of which disposal by the Fund of securities owned
by it is not reasonably practicable or it is not reasonably practicable for the
Fund fairly to determine the value of its net assets, or during any other
period when the Securities and Exchange Commission, by order, so permits.
3
<PAGE> 4
Section 5. Duties of the Fund
5.1 Subject to the possible suspension of the sale of shares of the
Series as provided herein, the Fund agrees to sell shares of the Series so long
as it has shares available.
5.2 The Fund shall furnish the Distributor copies of all information,
financial statements and other papers which the Distributor may reasonably
request for use in connection with the distribution of shares of the Series,
and this shall include one certified copy, upon request by the Distributor, of
all financial statements prepared for the Fund by independent public
accountants. The Fund shall make available to the Distributor such number of
copies of its Prospectus and annual and interim reports as the Distributor
shall reasonably request.
5.3 The Fund shall take, from time to time, but subject to the
necessary approval of the Trustees and the shareholders, all necessary action
to fix the number of authorized shares of the Series and such steps as may be
necessary to register the same under the Securities Act, to the end that there
will be available for sale such number of shares as the Distributor reasonably
may expect to sell. The Fund agrees to file from time to time such amendments,
reports and other documents as may be necessary in order that there will be no
untrue statement of a material fact in the Registration Statement, or necessary
in order that there will be no omission to state a material fact in the
Registration Statement which omission would make the statements therein
misleading.
5.4 The Fund shall use its best efforts to qualify and maintain the
qualification of any appropriate number of the Series' shares for sales under
the securities laws of such states as the Distributor and the Fund may approve;
provided that the Fund shall not be required to amend its Declaration of Trust
or By-Laws to comply with the laws of any state, to maintain an office in any
state, to change the terms of the offering of shares of the Series in any state
from the terms set forth in its Registration Statement, to qualify as a foreign
corporation in any state or to consent to service of process in any state other
than with respect to claims arising out of the offering of shares of the
Series. Any such qualification may be withheld, terminated or withdrawn by the
Fund at any time in its discretion. As provided in Section 8.1 hereof, the
expense of qualification and maintenance of qualification shall be borne by the
Fund. The Distributor shall furnish such information and other material
relating to its affairs and activities as may be required by the Fund in
connection with such qualifications.
4
<PAGE> 5
Section 6. Duties of the Distributor
6.1 The Distributor shall devote reasonable time and effort to effect
sales of shares of the Series, but shall not be obligated to sell any specific
number of shares. Sales of the shares of the Series shall be on the terms
described in the Prospectus. The Distributor may enter into like arrangements
with other investment companies. The Distributor shall compensate the selected
dealers as set forth in the Prospectus.
6.2 In selling the shares of the Series, the Distributor shall use
its best efforts in all respects duly to conform with the requirements of all
federal and state laws relating to the sale of such securities. Neither the
Distributor nor any selected dealer nor any other person is authorized by the
Fund to give any information or to make any representations, other than those
contained in the Registration Statement or Prospectus and any sales literature
approved by appropriate officers of the Fund.
6.3 The Distributor shall adopt and follow procedures for the
confirmation of sales to investors and selected dealers, the collection of
amounts payable by investors and selected dealers on such sales and the
cancellation of unsettled transactions, as may be necessary to comply with the
requirements of the National Association of Securities Dealers, Inc. (NASD).
6.4 The Distributor shall have the right to enter into selected
dealer agreements with registered and qualified securities dealers and other
financial institutions of its choice for the sale of shares of the Series,
provided that the Fund shall approve the forms of such agreements. Within the
United States, the Distributor shall offer and sell shares of the Series only
to such selected dealers as are members in good standing of the NASD. Shares
of the Series sold to selected dealers shall be for resale by such dealers only
at the offering price determined as set forth in the Prospectus.
Section 7. Reimbursement of the Distributor under the Plan
7.1 The Fund shall reimburse the Distributor for all costs incurred
by it in performing its duties under the Distribution and Service Plan and this
Agreement including amounts paid on a reimbursement basis to Pruco Securities
Corporation (Prusec), an affiliate of the Distributor, under the selected
dealer agreement between the Distributor and Prusec, amounts paid to other
securities dealers or financial institutions under selected dealer agreements
between the Distributor and such dealers and institutions and amounts paid for
personal service and/or the maintenance of shareholder accounts. Amounts
reimbursable under the Plan shall be accrued daily and paid monthly or at such
other intervals as the Trustees may determine but shall not be paid at a rate
that exceeds the lesser of (a) .25 of 1% per annum of the
5
<PAGE> 6
aggregate sales of the Series' shares, not including shares issued in
connection with reinvestment of dividends and capital gains distributions from
the Series, 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 Series' shares issued
after the effective date of the Plan. Payment of the distribution and service
fee shall be subject to the limitations of Article III, Section 26 of the NASD
Rules of Fair Practice.
7.2 So long as the Plan or any amendment thereto is in effect, the
Distributor shall inform the Trustees of the commissions and account servicing
fees to be paid by the Distributor to account executives of the Distributor and
to broker-dealers and financial institutions which have selected dealer
agreements with the Distributor. So long as the Plan (or any amendment
thereto) is in effect, at the request of the Trustees or any agent or
representative of the Fund, the Distributor shall provide such additional
information as may reasonably be requested concerning the activities of the
Distributor hereunder and the costs incurred in performing such activities.
7.3 Costs of the Distributor subject to reimbursement hereunder are
all costs of performing distribution activities with respect to the shares of
the Series and include, among others:
(a) sales commissions (including trailer commissions) paid to, or
on account of, account executives of the Distributor;
(b) indirect and overhead costs of the Distributor associated with
performance of distribution activities, including central
office and branch expenses;
(c) amounts paid to Prusec in reimbursement of all costs incurred
by Prusec in performing services under a selected dealer
agreement between Prusec and the Distributor for sale of
shares of the Series, including sales commissions and trailer
commissions paid to, or on account of, agents and indirect and
overhead costs associated with distribution activities;
(d) sales commissions (including trailer commissions) paid to, or
on account of, broker-dealers and financial institutions
(other than Prusec) which have entered into selected dealer
agreements with the Distributor with respect to shares of the
Series;
6
<PAGE> 7
(e) amounts paid to, or an account of, account executives of the
Distributor or of other broker-dealers or financial
institutions for personal service and/or the maintenance of
shareholder accounts; and
(f) advertising for the Series in various forms through any
available medium, including the cost of printing and mailing
Series Prospectuses, and periodic financial reports and sales
literature to persons other than current shareholders of the
Series.
Indirect and overhead costs referred to in clauses (b) and (c)
of the foregoing sentence include (i) lease expenses, (ii) salaries and
benefits of personnel including operations and sales support personnel, (iii)
utility expenses, (iv) communications expenses, (v) sales promotion expenses,
(vi) expenses of postage, stationery and supplies and (vii) general overhead.
Section 8. Allocation of Expenses
8.1 The Fund shall bear all costs and expenses of the continuous
offering of the Series' shares. including fees and disbursements of its counsel
and auditors, in connection with the preparation and filing of any required
Registration Statements and/or Prospectuses under the Investment Company Act or
the Securities Act, and all amendments and supplements thereto, and preparing
and mailing annual and periodic reports and proxy materials to shareholders
(including but not limited to the expense of setting in type any such
Registration Statements, Prospectuses, annual or periodic reports or proxy
materials). The Fund shall also bear the cost of expenses of qualification of
the Series' shares for sale, and, if necessary or advisable in connection
therewith, of qualifying the Fund as a broker or dealer, in such states of the
United States or other jurisdictions as shall be selected by the Fund and the
Distributor pursuant to Section 5.4 hereof and the cost and expense payable to
each such state for continuing qualification therein until the Fund decides to
discontinue such qualification pursuant to Section 5.4 hereof. As set forth in
Section 7 above, the Fund shall also bear the expenses it assumes pursuant to
the Plan with respect to Series' shares, so long as the Plan is in effect.
8.2 If the Plan is terminated or discontinued, the costs incurred by
the Distributor in performing the duties set forth in Section 6 hereof shall be
borne by the Distributor and will not be subject to reimbursement by the Fund.
7
<PAGE> 8
Section 9. Indemnification
9.1 The Fund agrees to indemnify, defend and hold the Distributor,
its officers and Directors and any person who controls the Distributor within
the meaning of Section 15 of the Securities Act, free and harmless from and
against any and all claims, demands, liabilities and expenses (including the
cost of investigating or defending such claims, demands or liabilities and any
counsel fees incurred in connection therewith) which the Distributor, its
officers, Directors or any such controlling person may incur under the
Securities Act, or under common law or otherwise, arising out of or based upon
any untrue statement of a material fact contained in the Registration Statement
or Prospectus or arising out of or based upon any alleged omission to state a
material fact required to be stated in either thereof or necessary to make the
statements in either thereof not misleading, except insofar as such claims,
demands, liabilities or expenses arise out of or are based upon any such untrue
statement or omission or alleged untrue statement or omission made in reliance
upon and in conformity with information furnished in writing by the Distributor
to the Fund for use in the Registration Statement or Prospectus; provided,
however, that this indemnity agreement shall not inure to the benefit of any
such officer, Director or controlling person unless a court of competent
jurisdiction shall determine in a final decision on the merits, that the person
to be indemnified was not liable by reason of willful misfeasance, bad faith or
gross negligence in the performance of its duties, or by reason of its reckless
disregard of its obligations under this Agreement (disabling conduct), or, in
the absence of such a decision, a reasonable determination, based upon a review
of the facts, that the indemnified person was not liable by reason of disabling
conduct, by (a) a vote of a majority of a quorum of Trustees who are neither
"interested persons" of the Fund as defined in Section 2(a)(19) of the
Investment Company Act nor parties to the proceeding, or (b) an independent
legal counsel in a written opinion. The Fund's agreement to indemnify the
Distributor, its officers and Directors and any such controlling person as
aforesaid is expressly conditioned upon the Fund's being promptly notified of
any action brought against the Distributor, its officers or Directors, or any
such controlling person, such notification to be given by letter or telegram
addressed to the Fund at its principal business office. The Fund agrees
promptly to notify the Distributor of the commencement of any litigation or
proceedings against it or any of its officers or Directors in connection with
the issue and sale of any shares of the Series.
9.2 The Distributor agrees to indemnify, defend and hold the Fund,
its officers and Trustees and any person who controls the Fund, if any, within
the meaning of Section 15 of the Securities Act, free and harmless from and
against any and all claims, demands, liabilities and expenses (including the
cost of investigating or defending against such claims, demands or
8
<PAGE> 9
liabilities and any counsel fees incurred in connection therewith) which the
Fund, its officers and Trustees or any such controlling person may incur under
the Securities Act or under common law or otherwise, but only to the extent
that such liability or expense incurred by the Fund, its Trustees or officers
or such controlling person resulting from such claims or demands shall arise
out of or be based upon any alleged untrue statement of a material fact
contained in information furnished in writing by the Distributor to the Fund
for use in the Registration Statement or Prospectus or shall arise out of or be
based upon any alleged omission to state a material fact in connection with
such information required to be stated in the Registration Statement or
Prospectus or necessary to make such information not misleading. The
Distributor's agreement to indemnify the Fund, its officers and Trustees and
any such controlling person as aforesaid, is expressly conditioned upon the
Distributor's being promptly notified of any action brought against the Fund,
its officers and Trustees or any such controlling person, such notification to
be given to the Distributor in writing at its principal business office.
Section 10. Duration and Termination of this Agreement
10.1 This Agreement shall become effective as of the date first above
written and shall remain in force for two years from the date hereof and
thereafter, but only so long as such continuance is specifically approved at
least annually by (a) the Trustees of the Fund, or by the vote of a majority of
the outstanding voting securities of the shares of the Series, and (b) by the
vote of a majority of those Trustees who are not parties to this Agreement or
interested persons of any such parties and who have no direct or indirect
financial interest in this Agreement or in the operation of the Fund's Plan or
in any agreement related thereto (Rule 12b-1 Trustees) cast in person at a
meeting called for the purpose of voting upon such approval.
10.2 This Agreement may be terminated at any time, without the
payment of any penalty, by a majority of the Rule 12b-1 Trustees or by vote of
a majority of the outstanding voting securities of the shares of the Series, or
by the Distributor, on sixty (60) days' written notice to the other party.
This Agreement shall automatically terminate in the event of its assignment.
10.3 The terms "affiliated person," "assignment," "interested person"
and "vote of a majority of the outstanding voting securities," when used in
this Agreement, shall have the respective meanings specified in the Investment
Company Act.
Section 11. Amendments to this Agreement
This Agreement may be amended by the parties only if such amendment is
specifically approved by (a) the Trustees of the Fund, or by the vote of a
majority of the outstanding voting securities
9
<PAGE> 10
of the shares of the Series, and (b) by the vote of a majority of the Rule
12b-1 Trustees cast in person at a meeting called for the purpose of voting on
such amendment.
Section 12. Governing Law
The provisions of this Agreement shall be construed and interpreted in
accordance with the laws of the State of New York as at the time in effect and
the applicable provisions of the Investment Company Act. To the extent that
the applicable law of the State of New York, or any of the provisions herein,
conflict with the applicable provisions of the Investment Company Act, the
latter shall control.
Section 13. Liabilities of the Fund
The name Prudential Government Securities Trust is the designation of
the Trustees under a Declaration of Trust, dated September 22, 1981, as
thereafter amended, and all persons dealing with the Fund must look solely to
the property of the Fund for the enforcement of any claims against the Fund as
neither the Trustees, officers, agents or shareholders assume any personal
liability for obligations entered into on behalf of the Fund.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year above written.
Prudential Securities
Incorporated
By: /s/ Robert F. Gunia
-------------------
Name: Robert F. Gunia
Title: Senior Vice President
Prudential Government Securities
Trust
By: /s/ Richard A. Redeker
----------------------
Name: Richard A. Redeker
Title: President
10
<PAGE> 1
Exhibit 11
<TABLE>
<S> <C>
SULLIVAN & CROMWELL
NEW YORK TELEPHONE: (212) 558-4000 125 BROAD STREET, NEW YORK 10004-2498
TELEX: 62694 (INTERNATIONAL) 127816 (DOMESTIC)
CABLE ADDRESS: LADYCOURT, NEW YORK 250 PARK AVENUE, NEW YORK 10177-0021
FACSIMILE: (212) 558-3588 (125 Broad Street) 1701 PENNSYLVANIA AVE., N.W. WASHINGTON, D.C. 20006-5805
(212) 558-3792 (250 Park Avenue) 444 SOUTH FLOWER STREET, LOS ANGELES 90071-2901
8, PLACE VENDOME, 75001 PARIS
ST. OLAVE'S HOUSE 9a IRONMONGER LANE, LONDON EC2V 8EY
101 COLLINS STREET, MELBOURNE 3000
2-1, MARUNOUCHI I-CHOME, CHIYODA-KU, TOKYO 100
GLOUCESTER TOWER, 11 PEDDER STREET, HONG KONG
</TABLE>
June 1, 1995
Prudential Government Securities Trust,
One Seaport Plaza,
New York, New York 10292.
Dear Sirs:
We have acted as counsel to Prudential Government Securities Trust
(the "Fund"), of which the Intermediate Term Series is a separate series (the
"Intermediate Term Series"), in connection with the proposed reorganization
(the "Reorganization") described in the form of Agreement and Plan of
Reorganization and Liquidation between the Fund and Prudential Adjustable Rate
Securities Fund, Inc. (the "Agreement") set forth as Appendix B to the
Prospectus and Proxy Statement included in the Registration Statement of the
Fund on Form N-14 (the "Registration Statement").
For the purposes of the opinion set forth below, we have examined such
corporate records, certificates and other documents, and such questions of law,
as we have considered necessary or appropriate for the purposes of this opinion.
<PAGE> 2
Prudential Government Securities Trust -2-
Upon the basis of such examination, we advise you that, in our
opinion, when the Agreement is executed and delivered by the Fund and
Prudential Adjustable Rate Securities Fund, Inc. and when the shares (the
"Securities") of beneficial interest, par value $.01 per share, of the
Intermediate Term Series are issued and sold as contemplated by the Agreement,
following effectiveness of the Registration Statement, for the consideration
stated in the Agreement, which consideration shall in each event be at least
equal to the net asset value and par value per Security, they will be validly
issued, fully paid and nonassessable by you.
The foregoing opinion is limited to the laws of the Commonwealth of
Massachusetts applying to business trusts generally, and we are expressing no
opinion as to the effect of other laws of the Commonwealth of Massachusetts or
the laws of any other jurisdiction. With respect to all matters of
Massachusetts law, we have relied upon the opinion, dated the date hereof, of
Sullivan & Worcester, and our opinion is subject to the same qualifications and
limitations with respect to such matters as are contained in such opinion of
Sullivan & Worcester.
<PAGE> 3
Prudential Government Securities Trust -3-
Also, we have relied as to certain matters on information obtained
from public officials, officers of the Company and other sources believed by
us to be responsible.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement referred to above. In giving such consent, we do not
thereby admit that we are in the category of persons whose consent is required
under Section 7 of the Act.
Very truly yours,
/s/ Sullivan & Cromwell
Sullivan & Cromwell
<PAGE> 1
[SHEREFF,FRIEDMAN, HOFFMAN & GOODMAN, LLP LETTERHEAD]
June 2, 1995
Prudential Adjustable Rate Securities Fund, Inc.
199 Water Street
New York, New York 10292
Prudential Government Securities Trust
(Intermediate Term Series)
199 Water Street
New York, New York 10292
Re: Reorganization of Prudential Adjustable
Rate Securities Fund, Inc. ("Adjustable Rate") and
Intermediate Term Series ("Intermediate
Series") of Prudential Government Securities
Trust (collectively, the "Funds")
Gentlemen:
We have acted as counsel to Adjustable Rate in connection with the
above-referenced transaction and have participated in the preparation and
filing of a Proxy Statement and Prospectus included as part of the registration
statement on Form N-14 under the Securities Act of 1933 (the "Registration
Statement"). In connection therewith, we have reviewed relevant documents and
information and have assisted in the preparation of the sections referred to in
such Proxy Statement and Prospectus as "Synopsis -- Federal Tax Consequences of
Proposed Reorganization" and "The Proposed Transaction -- Tax Considerations".
As set forth under "The Proposed Transaction -- Tax Considerations," a
condition to closing of the transaction is that our firm, as counsel, render an
opinion, with respect to the federal income tax consequences set forth in such
section.
Based upon current law, including cases and administrative
interpretations thereof, and upon the information, representations and
assumptions contained in the
<PAGE> 2
Prudential Adjustable Rate Securities Fund, Inc.
Prudential Government Securities Trust
June 2, 1995
Page 2
Registration Statement and the form of Agreement and Plan of Reorganization and
Liquidation, we are not aware of any reason why, upon receipt of the Officer's
Certificates from the Funds in substantially the forms attached hereto as
Exhibits A and B, our firm would not be able to render such opinion at the time
of the closing of such transaction.
No opinion is expressed herein relating to the qualification of
Adjustable Rate or Intermediate Series as a regulated investment company under
the Internal Revenue Code of 1986, as amended.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name and to any reference to our
firm in the Registration Statement or in the Proxy Statement and Prospectus
constituting parts thereof.
Very truly yours,
/s/ SHEREFF, FRIEDMAN, HOFFMAN & GOODMAN, LLP
---------------------------------------------
Shereff, Friedman, Hoffman & Goodman, LLP
SFH&G:JHG:JHN:SDB:LEB:dmw
<PAGE> 3
EXHIBIT A
THE PRUDENTIAL ADJUSTABLE RATE SECURITIES FUND, INC.
OFFICER'S CERTIFICATE
I, [Name, Title] of Prudential Adjustable Rate Securities Fund, Inc.
("Adjustable Rate"), in connection with the transaction (the "Reorganization")
contemplated by the Agreement and Plan of Reorganization and Liquidation, dated
as of _________, 1995 (the "Agreement"), by and between Adjustable Rate and
Prudential Government Securities Trust ("Government Trust"), do hereby certify
that on the effective date of the Reorganization, the following statements are
true and correct. Capitalized terms used herein and not otherwise defined
herein have the meanings assigned to them in the Agreement.
1. The fair market value of shares of beneficial interest of
the Intermediate Term Series ("Intermediate Series") of Government Trust (the
"Shares") to be received by each Adjustable Rate shareholder are equal to the
fair market value of the Adjustable Rate shares surrendered in exchange
therefor upon the liquidation of Adjustable Rate.
2. There is no plan or intention by any shareholder of Adjustable
Rate who owns 5 percent or more of Adjustable Rate stock, and to the best of
the knowledge of management of Adjustable Rate, there is no plan or intention
on the part of the remaining shareholders of Adjustable Rate, to sell,
exchange, or otherwise dispose of a number of Shares of Intermediate Series
received in the Reorganization that would reduce Adjustable Rate shareholders'
ownership of Shares of Intermediate Series to a number of Shares having a
value, as of the Closing Date of the Reorganization, of less than 50 percent of
the value of all formerly outstanding stock of Adjustable Rate as of the same
date. For purposes of this representation, shares of Adjustable Rate stock
exchanged for cash or other property, surrendered by dissenters, or exchanged
for cash in lieu of fractional Shares of Intermediate Series will be treated as
outstanding Adjustable Rate stock at the Closing Date of the Reorganization.
Moreover, shares of Adjustable Rate stock and Shares of Intermediate Series
held by Adjustable Rate shareholders and otherwise sold, redeemed, or disposed
of prior or subsequent to the Reorganization and as part of the Reorganization
will be considered in making this representation.
3. Pursuant to the Agreement, Adjustable Rate will distribute in
liquidation of Adjustable Rate, the Shares of Intermediate Series received by
Adjustable Rate in the Reorganization.
<PAGE> 4
4. The liabilities of Adjustable Rate assumed by Intermediate
Series pursuant to the Reorganization, plus the liabilities, if any, to which
assets transferred pursuant to the Reorganization are subject are less than 20%
of the total consideration for the Reorganization, all such liabilities were
incurred by Adjustable Rate in the ordinary course of its business, and
Intermediate Series will pay no other consideration, except for the Shares, in
connection with the Reorganization.
5. All expenses incurred by Adjustable Rate with respect to the
Reorganization will be borne by Adjustable Rate. Each shareholder of
Adjustable Rate will pay its respective share of expenses, if any, incurred in
connection with the Reorganization.
6. There is no intercorporate indebtedness existing between
Intermediate Series and Adjustable Rate that was issued, acquired, or will be
settled at a discount.
7. Adjustable Rate does not own, directly or indirectly, nor has
it owned during the past five years, directly or indirectly, any stock of
Intermediate Series.
8. The assets of Adjustable Rate transferred to Intermediate
Series will include all assets owned by Adjustable Rate at fair market value on
the Closing Date subject to all known liabilities of Adjustable Rate at such
time.
9. In accordance with the terms of the Agreement, Adjustable Rate
will transfer all of its business and will transfer assets to Intermediate
Series representing at least 90% of the fair market value of the net assets,
and at least 70% of the fair market value of the gross assets, held by
Adjustable Rate immediately prior to the Reorganization. For purposes of this
representation, amounts paid by Adjustable Rate to shareholders who receive
cash or other property, amounts paid to dissenters, amounts used by Adjustable
Rate to pay its reorganization expenses and all redemptions and distributions
(other than regular, normal redemptions and dividends) made by Adjustable Rate
immediately preceding the Reorganization will be included as assets of
Adjustable Rate held immediately prior to the Reorganization.
10. The fair market value of the assets of Adjustable Rate
transferred to Intermediate Series will equal or exceed the sum of liabilities
assumed by Intermediate Series, plus the amount of liabilities, if any, to
which the transferred assets are subject.
11. Adjustable Rate is not under the jurisdiction of a court in a
Title 11 or similar case within the meaning of Code Section 368(a)(3)(A).
12. No cash will be paid to the shareholders of Adjustable Rate
in lieu of fractional shares.
A-2
<PAGE> 5
13. For federal income tax purposes, Adjustable Rate qualifies as
a regulated investment company (as defined in Code Section 851) and has so
qualified since its formation. The provisions of Code Sections 851 through 855
apply to Adjustable Rate and will continue to apply through the closing of the
Reorganization.
14. As of the closing of the Reorganization, Adjustable Rate will
have declared to the shareholders of record of Adjustable Rate a dividend or
dividends payable prior to closing, which together with all previous such
dividends will have the effect of distributing all of Adjustable Rate's
investment company taxable income plus the excess of its interest income, if
any, excludable from gross income under Code Section 103(a) over its deductions
disallowed under Sections 265 and 171(a)(2) for the taxable year of Adjustable
Rate ending on the Closing Date and all its net capital gain realized in such
taxable year.
15. I am familiar with the transactions contemplated herein and am
authorized to make the representations contained herein.
IN WITNESS WHEREOF, I have executed this certificate as of the [ ]
day of _________, 1995.
------------------------------
[Name]
[Title]
A-3
<PAGE> 6
EXHIBIT B
PRUDENTIAL GOVERNMENT SECURITIES TRUST
(INTERMEDIATE TERM SERIES)
OFFICER'S CERTIFICATE
I, [Name] [Title] of Prudential Government Securities Trust
("Government Trust") on behalf of its Intermediate Series Series ("Intermediate
Series"), in connection with the transactions (the "Reorganization")
contemplated by the Agreement and Plan of Reorganization and Liquidation, dated
as of _________, 1995 (the "Agreement"), by and between Government Trust and
Prudential Adjustable Rate Securities Fund, Inc. ("Adjustable Rate"), do hereby
certify that on the effective date of the Reorganization, the following
statements are true and correct. Capitalized terms used herein and not
otherwise defined herein have the meanings assigned to them in the Agreement.
1. Except to the extent necessary to comply with its legal
obligation to redeem its own shares, Intermediate Series has no plan or
intention to reacquire any of its shares of beneficial interest (the "Shares")
issued in the Reorganization.
2. Except with respect to assets of Adjustable Rate which
are inconsistent with the investment objectives and/or investment restrictions
of Intermediate Series, Intermediate Series has no plan or intention to sell or
otherwise dispose of any of the assets of the Adjustable Rate acquired in the
Reorganization, except for dispositions made in the ordinary course of
business.
3. Following the Reorganization, Intermediate Series will
use a significant portion of Adjustable Rate's historic business assets (i.e.,
20% of those assets used in Adjustable Rate's historical business, for this
purpose, treating cash or cash equivalents as assets of Adjustable Rate which
will not be so used) in its business.
4. The liabilities of Adjustable Rate assumed by
Intermediate Series pursuant to the Reorganization plus the liabilities, if
any, to which assets transferred pursuant to the Reorganization are subject,
plus any other consideration other than the Shares, will be less than 20% of
the total consideration for the Reorganization, and Intermediate Series will
pay no additional consideration, except for the Shares, in connection with the
Reorganization.
5. Intermediate Series will pay the expenses, if any,
incurred by it in connection with the Reorganization.
6. There is no intercorporate indebtedness existing
between Intermediate Series and Adjustable Rate that was issued, acquired, or
will be settled at a discount.
<PAGE> 7
7. Intermediate Series does not own, directly or
indirectly, nor has it owned during the past five years, directly or
indirectly, any stock of Adjustable Rate.
8. In accordance with the terms of the Agreement,
Intermediate Series will acquire all of Adjustable Rate's business, and will
acquire assets representing at least 90% of the fair market value of the net
assets, and at least 70% of the fair market value of the gross assets, held by
Adjustable Rate immediately prior to the Reorganization. For purposes of this
representation, amounts paid by Adjustable Rate to shareholders who receive
cash or other property, amounts paid to dissenters, amounts used by Adjustable
Rate to pay its reorganization expenses and all redemptions and distributions
(other than regular, normal redemptions and dividends) made by Adjustable Rate
immediately preceding the Reorganization will be included as assets of
Adjustable Rate held immediately prior to the Reorganization.
9. Intermediate Series is not under the jurisdiction of a
court in a Title 11 or similar case within the meaning of Code Section
368(a)(3)(A).
10. For federal income tax purposes, Intermediate Series
qualifies as a regulated investment company (as defined in Code Section 851)
and has so qualified since its formation. The provisions of Code Sections 851
through 855 will apply to Intermediate Series prior to the Reorganization and
will continue to apply after the closing of the Reorganization.
11. I am familiar with the transactions contemplated herein
and am authorized to make the representations contained herein.
IN WITNESS WHEREOF, I have executed this certificate as of the
[ ] day of ___________, 1995.
-----------------------------
[Name]
[Title]
B-2
<PAGE> 1
EXHIBIT 14(a)
CONSENT OF INDEPENDENT AUDITORS
We consent to the use in this Registration Statement of Prudential Government
Securities Trust of our report on the financial statements of Prudential
Adjustable Rate Securities Fund, Inc. dated April 13, 1995, which is a part of
such Registration Statement, and to the references to us under the headings
"Financial Highlights" in the Prospectus of Adjustable Rate Securities Fund,
Inc. dated June , 1995, which is incorporated by reference in such
Registration Statement.
Deloitte & Touche LLP
New York, New York
June 6, 1995
<PAGE> 1
Exhibit 14 (b)
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Statement of Additional Information
constituting part of this registration statement on Form N-14 (the "N-14
Registration Statement") of our report dated January 16, 1995, relating to the
financial statements and financial highlights of Prudential Government
Securities Trust - Intermediate Term Series, Prudential Government Securities
Trust - Money Market Series and Prudential Government Securities Trust - U.S.
Treasury Money Market Series (the "Report"). We also consent to the use in the
Statement of Additional Information constituting part of Post-Effective
Amendment No. 20 to the registration statement on Form N-1A (the "N-1A
Registration Statement") of the Report which appears in the Statement of
Additional Information; the incorporation by reference of the Report into the
Prospectus which constitutes part of the N-1A Registration Statement; and, to
the incorporation by reference of the Report in the Prospectus and Proxy
Statement constituting part of the N-14 Registration Statement. We also
consent to the references to us in the N-1A Registration Statement under the
heading "Custodian, Transfer and Dividend Disbursing Agent and Independent
Accountants" in the Statement of Additional Information and under the heading
"Financial Highlights" in the Prospectus.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
New York, New York
June 5, 1995
<PAGE> 1
EXHIBIT 17(a)
PROXY
PRUDENTIAL ADJUSTABLE RATE SECURITIES FUND, INC.
ONE SEAPORT PLAZA
NEW YORK, NEW YORK 10292
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints S. Jane Rose, Ellyn C. Acker and Grace
Torres as Proxies, each with the power of substitution, and hereby authorizes
each of them to represent and to vote, as designated below, all the shares of
common stock of the Prudential Adjustable Rate Securities Fund, Inc. held of
record by the undersigned on May 26, 1995 at the Special Meeting of Shareholders
to be held on August 15, 1995, or any adjournment thereof.
1. Approval or disapproval of the Agreement and Plan of Reorganization
and Liquidation
/ / APPROVE / / DISAPPROVE / / ABSTAIN
2. In their discretion, the Proxies are authorized to vote upon such
other business as may properly come before the Meeting.
(over)
(Continued from other side)
PLEASE MARK, SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY, USING THE ENCLOSED
ENVELOPE.
THIS PROXY WHEN EXECUTED WILL BE VOTED IN THE MANNER DESCRIBED HEREIN BY THE
UNDERSIGNED SHAREHOLDER. IF EXECUTED AND NO DIRECTION IS MADE, THIS PROXY WILL
BE VOTED FOR PROPOSAL 1.
Please sign exactly as name appears below. When shares are held by joint
tenants, both should sign.
When signing as attorney,
executor, administrator, trustee
or guardian, please give full
title as such. If a corporation,
please sign in full corporate name
by president or other authorized
officer. If a partnership, please
sign in partnership name by
authorized person.
Dated , 1995
----------------------
----------------------------------
Signature
----------------------------------
Signature if held jointly
<PAGE> 1
EXHIBIT 17(b)
<TABLE>
<C> <S>
MANY SHAREHOLDERS THINK THEIR VOTES ARE NOT IMPORTANT.
ON THE CONTRARY, THEY ARE VITAL.
PRUDENTIAL ADJUSTABLE The Special Meeting on August 15, 1995 will have to be
RATE SECURITIES adjourned without conducting any business if less than a
FUND, INC. majority of the eligible shares are represented.
NEEDS And the Fund, at shareholders' expense, will have to continue
YOUR PROXY VOTE to solicit votes until a quorum is obtained.
BEFORE Your vote, then, could be critical in allowing the Fund to hold
AUGUST 15, 1995 the meeting as scheduled.
SO PLEASE RETURN YOUR PROXY CARD AS SOON AS POSSIBLE.
All shareholders will benefit from your cooperation.
Thank you.
</TABLE>
<PAGE> 1
EXHIBIT 17(c)
PRUDENTIAL ADJUSTABLE RATE SECURITIES FUND, INC.
June , 1995
Dear Shareholder:
The attached proxy materials describe a proposal whereby all of the assets
of Prudential Adjustable Rate Securities Fund, Inc. (Adjustable Rate Fund) will
be acquired by Prudential Government Securities Trust -- Intermediate Term
Series (Intermediate Series) and the liabilities of Adjustable Rate Fund, if
any, will be assumed by Intermediate Series. If the proposal is approved and
implemented, each shareholder of Adjustable Rate Fund automatically would become
a shareholder of Intermediate Series.
Your Board of Directors recommends a vote FOR the reorganization proposal.
The Board believes that the investment strategies of the two Funds, while not
identical, are compatible, and that combining the two Funds may benefit
Adjustable Rate Fund's shareholders by reducing the expenses borne by that
Fund's shareholders as a percentage of net assets. The attached materials give
more information about the proposed reorganization and the two Funds.
Your vote is important no matter how many shares you own. Voting your
shares early will permit Adjustable Rate Fund to avoid costly follow-up mail and
telephone solicitation. After reviewing the attached materials, please complete,
date and sign your proxy card and mail it in the enclosed return envelope today.
Very truly yours,
RICHARD A. REDEKER
President, Prudential Adjustable Rate
Securities Fund, Inc.
<PAGE> 1
EXHIBIT 17(d)
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 23, 1981
FILE NO. 2
==============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM N-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /X/
PRE-EFFECTIVE AMENDMENT NO.__________________ / /
POST-EFFECTIVE AMENDMENT NO.__________________ / /
AND/OR
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 /X/
AMENDMENT NO.__________________ / /
(CHECK APPROPRIATE BOX OR BOXES)
----------------
CHANCELLOR GOVERNMENT SECURITIES TRUST
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
100 GOLD STREET
NEW YORK, NEW YORK 10038
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (212) 791-7123
ROBERT H. WADSWORTH
100 GOLD STREET
NEW YORK, NEW YORK 10038
(NAME AND ADDRESS OF AGENT FOR SERVICE)
COPY TO:
JOHN E. BAUMGARDNER, JR., ESQ.
SULLIVAN & CROMWELL
125 BROAD STREET
NEW YORK, NEW YORK 10004
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: As soon as practicable after
the effective date of the registration statement.
----------------
PURSUANT TO RULE 24f-2 UNDER THE INVESTMENT COMPANY ACT OF 1940,
REGISTRANT HEREBY ELECTS TO REGISTER AN INDEFINITE NUMBER OF SHARES OF
BENEFICIAL INTEREST. THE AMOUNT OF THE REGISTRATION FEE IS $500.00.
----------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
================================================================================
<PAGE> 1
EXHIBIT 17(e)
Prudential Government Securities Trust
(Intermediate Term Series)
Supplement dated May 12, 1995 to
Prospectus dated April 3, 1995
HOW THE TRUST INVESTS
INVESTMENT OBJECTIVE AND POLICIES
The Trustees of the Trust have approved modifications to the investment
policies and restrictions of the Trust's Intermediate Term Series (the Series).
These changes, along with the modifications proposed to the Series'
Distribution and Service Plan described below under "How the Trust is
Managed--Distributor", will be submitted to shareholders for their approval at
a special meeting scheduled to be held in or about July 1995. The changes to
the Series' investment policies and restrictions are summarized below and will
be described in more detail in the proxy statement which will be mailed to
shareholders.
A number of the Series' investment policies and restrictions are
proposed to be eliminated or modified which would permit the Series, among
other things, (1) to reduce the percentage of its total assets which must be
invested in government securities to 65% (currently 80%); (2) to invest up to
35% of its remaining total assets in corporate and other
non-governmental/agency debt obligations, including, but not limited to,
collateralized mortgage obligations, stripped mortgaged-backed securities and
asset-backed securities rated at least A by S&P or Moody's or, if unrated,
determined to be of comparable quality by the investment adviser; (3) to
shorten its maximum weighted average maturity to 5 years (currently 10 years)
and change its name to the "Short-Intermediate Term Series", (4) to invest up
to 15% of its net assets in securities with legal or contractual restrictions
on resale and other illiquid securities (5) to enter into interest rate swap
transactions; (6) to purchase and sell financial futures contracts and options
thereon; (7) to enter into short sales; and (8) to increase its borrowing limit
to 33 1/3% of its total assets and borrow to take advantage of investment
opportunities.
HOW THE TRUST IS MANAGED
MANAGER
Effective May 5, 1995, Barbara L. Kenworthy, a managing director and senior
portfolio manager of Prudential Investment Advisors, a unit of The Prudential
Investment Corporation (PIC), became the portfolio manager of the Series. Ms.
Kenworthy has responsibility for the day-to-day management of the Series'
portfolio and 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.
DISTRIBUTOR
The Trustees of the Trust have also approved modifications to the Series'
Distribution and Service Plan (the Plan) to change it from a reimbursement to a
compensation plan. Under the current Plan the Distributor is reimbursed for
certain ongoing costs actually incurred by it in connection with the services
and activities undertaken to distribute shares of the Series and service
shareholder accounts (Distribution Activities). As proposed to be amended, the
Plan would authorize the Series to pay the Distributor the same maximum annual
fee as under the current Plan as compensation for its Distribution Activities.
<PAGE> 2
Prudential Government Securities Trust
(Intermediate Term Series)
- --------------------------------------------------------------------------------
PROSPECTUS DATED APRIL 3, 1995
- --------------------------------------------------------------------------------
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 Intermediate Term Series (the Series) is to
achieve a high level of income consistent with providing reasonable safety by
investing principally in a diversified portfolio of intermediate term securities
issued or guaranteed by the United States Government or its agencies or
instrumentalities. There is no assurance that the Series' investment objective
will be achieved. See "How the Trust Invests-Investment Objective and Policies."
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 April 3, 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> 3
- --------------------------------------------------------------------------------
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 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 by investing principally in a
diversified portfolio of securities issued or guaranteed by the United States
Government or its agencies or instrumentalities with maturities of 10 years or
less. There is 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
United States Government securities, 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. See "How the Trust
Invests-Investment Objective and Policies" at page 6.
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 February 28, 1995 PMF served as
manager or administrator to 69 investment companies, including 39 mutual funds,
with aggregate assets of approximately $46 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 9.
- --------------------------------------------------------------------------------
2
<PAGE> 4
- --------------------------------------------------------------------------------
WHO DISTRIBUTES THE SERIES' SHARES?
Prudential Securities Incorporated (PSI or the Distributor) acts as the
Distributor of the Series' shares. The Trust reimburses PSI for expenses related
to the distribution of the Series' shares at an annual 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 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 14 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 11 and "Shareholder Guide-How to Buy Shares of the Trust" at page 14.
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 15.
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 12.
- --------------------------------------------------------------------------------
3
<PAGE> 5
- --------------------------------------------------------------------------------
TRUST EXPENSES-INTERMEDIATE TERM SERIES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
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%
=====
</TABLE>
<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: $9 $27 $47 $104
<FN>
- -----------
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.
</FN>
</TABLE>
- --------------------------------------------------------------------------------
4
<PAGE> 6
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
(for a share of beneficial interest outstanding throughout each of
the years 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>
INTERMEDIATE TERM SERIES
------------------------------------------------------------------------------------------
YEAR ENDED NOVEMBER 30,
------------------------------------------------------------------------------------------
1994 1993 1992 1991 1990 1989 1988(+) 1987 1986 1985
---- ---- ---- ---- ---- ---- ------- ---- ---- ----
<S> <C> <C> <C> <C> <C> <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 $ 9.92 $10.24 $10.97 $10.48 $10.01
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS:
- ----------------------------------
Net investment income .............. .64 .69 .75 .82 .84 .92 .92 .92 .96 .95
Net realized and unrealized gain
(loss) on investment transactions. (.89) .11 (.03) .31 (.21) .12 (.29) (.71) .68 .54
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total from investment
operations ....................... (.25) .80 .72 1.13 .63 1.04 .63 .21 1.64 1.49
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
LESS DISTRIBUTIONS:
- -------------------
Dividends from net investment
income ........................... (.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 ................ (.64) (.71) (.75) (.84) (.88) (1.00) (.95) (.94) (1.15) (1.02)
Net asset value, end of year ....... $ 9.17 $10.06 $ 9.97 $10.00 $ 9.71 $ 9.96 $ 9.92 $10.24 $10.97 $10.48
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
TOTAL RETURN(+)(+) ................. (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 year (000) ...... $241,980 $347,944 $303,451 $298,086 $328,458 $396,519 $473,982 $633,652 $866,218 $414,835
Average net assets (000) ........... $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 ........................... .84% .80% .79% .79% .88% .86% .83% .72% .75% .67%
Expenses, excluding distribution
fees ........................... .63% .59% .58% .63% .63% .63% .59% .55% .52% .50%
Net investment income ............ 5.36% 6.80% 7.47% 8.36% 8.60% 9.16% 9.39% 8.30% 8.51% 8.04%
Portfolio turnover rate ............ 431% 44% 60% 151% 68% 186% 28% 59% 139% 191%
<FN>
- -------------------
(+) 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.
(+)(+) 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.
</FN>
</TABLE>
- --------------------------------------------------------------------------------
5
<PAGE> 7
- --------------------------------------------------------------------------------
HOW THE TRUST INVESTS
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES
THE INVESTMENT OBJECTIVE OF THE SERIES IS TO ACHIEVE A HIGH LEVEL OF INCOME
CONSISTENT WITH PROVIDING REASONABLE SAFETY. THERE IS NO ASSURANCE THAT THIS
OBJECTIVE WILL BE ACHIEVED.
UNITED STATES GOVERNMENT SECURITIES
THE SERIES SEEKS TO ACHIEVE ITS OBJECTIVE BY INVESTING IN UNITED STATES
GOVERNMENT SECURITIES THAT HAVE MATURITIES OF TEN YEARS OR LESS, 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. (In the case of securities with put features, when the put is at the
option of the Trust as holder of the security, maturity will be defined as the
lesser of stated final maturity or put date.) 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 Series may invest which are not backed by
the full faith and credit of the United States include obligations of the
Tennessee Valley Authority, the Federal National Mortgage Association 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 Intermediate Term Series will
limit its investments to those which are eligible for federal credit unions.
CERTAIN UNITED STATES GOVERNMENT SECURITIES, SUCH AS THOSE ISSUED BY THE
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION AND THE FEDERAL NATIONAL MORTGAGE
ASSOCIATION, ARE MORTGAGE-BACKED "PASS-THROUGH" SECURITIES. The U.S. Government
or the issuing agency guarantees the payment of principal and interest of these
securities. However, the guarantees do not extend to the securities' yield or
value, which is likely to vary inversely with fluctuations in interest rates,
nor do the guarantees extend to the yield or value of the Trust's shares. Such
mortgage-backed securities are subject to more rapid repayment than their stated
maturity date as a result of the pass-through of prepayments of principal on the
underlying mortgage obligations. Accordingly, the Series' ability to maintain
positions in high-yielding mortgage-backed securities will be affected by
reductions in the principal amount of such securities resulting from such
prepayments, and its ability to reinvest the returns of principal at comparable
yields is subject to interest rates prevailing generally at that time. In
addition, during periods of declining interest rates, prepayment of mortgages
underlying mortgage-backed securities tends to accelerate. For purposes of the
Trust's 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).
THE SERIES WILL INVEST AT LEAST 80% OF ITS TOTAL ASSETS IN THE TYPES OF
GOVERNMENT SECURITIES DESCRIBED ABOVE, INCLUDING REPURCHASE AGREEMENTS WITH
RESPECT TO SUCH SECURITIES.
THE SERIES' INVESTMENT OBJECTIVE AND POLICIES DESCRIBED ABOVE 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 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' 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.
6
<PAGE> 8
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.
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 average weighted maturity of the Series' investments will be
from 3 to 10 years.
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 Securities and Exchange Commission (SEC).
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES
The Series may purchase or sell securities on a when-issued or delayed
delivery basis, provided that delivery takes place within 120 days of the
transaction. 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.
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.
7
<PAGE> 9
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 Seires 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 20% limitation applicable to borrowings. See
"Borrowing" below.
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.
ILLIQUID SECURITIES
The Series may invest up to 10% of its assets in securities for which there
is no readily available market, including repurchase agreements which have a
maturity of longer than seven days. The Series may not, however, invest in
securities for which there are legal or contractual restrictions on resale
(i.e., restricted securities).
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.
8
<PAGE> 10
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 .84%. 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 February 28, 1995 PMF served as the manager to 39 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 $46 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 current portfolio manager of the Series is David Graham, a Vice
President of Prudential Investment Advisors, a unit of PIC. Mr. Graham has
responsibility for the day-to-day management of the Series' portfolio. Mr.
Graham was previously employed by Alliance Capital Management L.P. (February
1993-October 1993) as a fixed-income portfolio manager in the mortgage-backed
securities group, by Equitable Capital Management Corporation (May 1989-February
1993) where he served as a Vice President and was responsible for managing total
return accounts with mortgage securities, and prior thereto, by Metropolitan
Life Insurance Company (June 1986-April 1989) where he served as a portfolio
manager. Mr. Graham joined PIC on November 15, 1993.
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
9
<PAGE> 11
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 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 REIMBURSES THE DISTRIBUTOR FOR ITS
DISTRIBUTION-RELATED EXPENSES 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.
Actual distribution expenses for any given year may exceed the fees received
pursuant to the Plan and will be carried forward and paid by the Trust in future
years so long as the Plan is in effect. See "Distributor" in the Statement of
Additional Information.
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. At November 30, 1994, the aggregate
amount of distribution expenses incurred by the Distributor and not yet
reimbursed by the Series was approximately $11,346,000, which represented 4.7%
of the Series' net assets. These unreimbursed amounts may be recovered by the
Distributor through future payments under the Plan.
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.
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.
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 not previously reimbursed, including carry-over amounts.
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.
10
<PAGE> 12
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.
- --------------------------------------------------------------------------------
HOW THE TRUST VALUES ITS SHARES
- --------------------------------------------------------------------------------
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
11
<PAGE> 13
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.
- --------------------------------------------------------------------------------
HOW THE TRUST CALCULATES PERFORMANCE
- --------------------------------------------------------------------------------
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
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."
- --------------------------------------------------------------------------------
TAXES, DIVIDENDS AND DISTRIBUTIONS
- --------------------------------------------------------------------------------
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 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.
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. Tax-exempt
shareholders will not be required to pay taxes on amounts distributed to them.
12
<PAGE> 14
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.
WITHOLDING 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
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.
- --------------------------------------------------------------------------------
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.
The shareholders of the Money Market Series, the 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
13
<PAGE> 15
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.
- --------------------------------------------------------------------------------
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.
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. If you have an account with
Prudential Securities (or open such an account), you may ask Prudential
Securities to purchase shares of the Series on your behalf. On the business day
following confirmation that a free credit balance (i.e., immediately available
funds) exists in your account, Prudential
14
<PAGE> 16
Securities, at your request, will effect a purchase order for shares of the
Series in an amount up to the balance at the NAV determined that day. Funds held
by Prudential Securities on behalf of its clients in the form of free credit
balances are delivered to State Street by Prudential Securities and begin
earning dividends 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.
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 (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.
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, 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
15
<PAGE> 17
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 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.
16
<PAGE> 18
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.
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.
17
<PAGE> 19
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.
* 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.
18
<PAGE> 20
- --------------------------------------------------------------------------------
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
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 Strategist 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
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> 21
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
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
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............. 7
Investment Restrictions.................... 8
HOW THE TRUST IS MANAGED..................... 9
Manager.................................... 9
Distributor................................ 9
Portfolio Transactions..................... 11
Custodian and Transfer and
Dividend Disbursing Agent................ 11
HOW THE TRUST VALUES ITS SHARES.............. 11
HOW THE TRUST CALCULATES PERFORMANCE......... 12
TAXES, DIVIDENDS AND DISTRIBUTIONS........... 12
GENERAL INFORMATION.......................... 13
Description of Shares...................... 13
Additional Information..................... 14
SHAREHOLDER GUIDE............................ 14
How to Buy Shares of the Trust............. 14
How to Sell Your Shares.................... 15
How to Exchange Your Shares................ 17
Shareholder Services....................... 18
THE PRUDENTIAL MUTUAL FUND FAMILY............A-1
</TABLE>
- ------------------------------------------------
111A 4440381
- ------------------------------------------------
CUSIP #: 744342 10 6
- ------------------------------------------------
PRUDENTIAL
GOVERNMENT
SECURITIES
TRUST
INTERMEDIATE TERM SERIES
------------------------
PRUDENTIAL MUTUAL FUNDS [PRUDENTIAL LOGO]
BUILDING YOUR FUTURE
ON OUR STRENGTH(SM)
<PAGE> 1
PRUDENTIAL ADJUSTABLE RATE
SECURITIES FUND, INC.
- --------------------------------------------------------------------------------
PROSPECTUS DATED JUNE , 1995
- --------------------------------------------------------------------------------
Prudential Adjustable Rate Securities Fund, Inc. (the Fund) is an open-end,
diversified management investment company whose investment objective is high
current income consistent with low volatility of principal. The Fund seeks to
achieve its objective by investing, under normal circumstances, at least 65% of
its total assets in adjustable rate securities, including mortgage-backed
securities issued or guaranteed by private institutions or the U.S. Government,
its agencies or instrumentalities, asset-backed securities and corporate and
other debt obligations, all of which have interest rates which reset at periodic
intervals. The Fund may invest the remainder of its assets in fixed rate
securities. The Fund expects that under normal market conditions at least 75% of
the value of the securities purchased by the Fund (excluding options and
futures) will be rated "AA" or "AAA" by Standard & Poor's Ratings Group
(Standard & Poor's) or "Aa" or "Aaa" by Moody's Investors Service (Moody's) or,
if unrated, will be determined to be of comparable quality by the investment
adviser. The Fund expects that under normal market conditions the remaining 25%
of the value of the securities purchased by the Fund (excluding options and
futures) will be rated "A" by Moody's or Standard & Poor's or, if unrated,
determined to be of comparable quality by the investment adviser. The Fund may
also engage in various derivative securities transactions including the purchase
and sale of put and call options on securities and financial indices and futures
contracts and related options. While these options and futures contracts are not
themselves rated, the securities acquired pursuant to these options and futures
contracts will be rated at least "A" by Standard & Poor's or Moody's or, if
unrated, be determined to be of comparable quality by the investment adviser. In
addition, the Fund may engage in short selling and use leverage, including
reverse repurchase agreements, dollar rolls and bank borrowings, which entails
additional risks to the Fund. See "Other Investments and Policies". There can be
no assurance that the Fund's investment objective will be achieved. See "How the
Fund Invests--Investment Objective and Policies." The Fund's address is One
Seaport Plaza, New York, New York 10292, and its telephone number is (800)
225-1852.
- --------------------------------------------------------------------------------
This Prospectus sets forth concisely the information about the Fund that a
prospective investor should know before investing. Additional information about
the Fund has been filed with the Securities and Exchange Commission in a
Statement of Additional Information, dated June , 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 Fund at the
address or telephone number noted above.
- --------------------------------------------------------------------------------
Investors are advised to read this Prospectus and retain it for future
reference.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSIONS 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> 2
- --------------------------------------------------------------------------------
FUND HIGHLIGHTS
The following summary is intended to highlight certain information
contained in the Prospectus and is qualified in its entirety by more detailed
information appearing elsewhere herein.
WHAT IS PRUDENTIAL ADJUSTABLE RATE SECURITIES FUND, INC?
Prudential Adjustable Rate Securities Fund, Inc. is a mutual fund. A mutual
fund pools the resources of investors by selling its shares to the public and
investing the proceeds of such sale in a portfolio of securities designed to
achieve its investment objective. Technically, the Fund is an open-end,
diversified management investment company.
WHAT IS THE FUND'S INVESTMENT OBJECTIVE?
The Fund's investment objective is to seek high current income consistent
with low volatility of principal. There can be no assurance that the Fund's
investment objective will be achieved. See "How the Fund Invests--Investment
Objective and Policies" at page 7.
IMPORTANT FUND INFORMATION
The Board of Directors of the Fund has recently approved a proposal
to exchange the assets and liabilities of the Fund for shares of
Prudential Government Securities Trust-Intermediate Term Series
(Intermediate Series). Class A and Class B shares of the Fund would be
exchanged at net asset value for shares of equivalent value of
Intermediate Series.
The transfer has been approved by Intermediate Series' Trustees and
the Fund's Directors, and is subject to approval by the Fund's
shareholders. It is anticipated that a proxy statement/prospectus will be
mailed to the Fund's shareholders in early July 1995.
Under the terms of the proposal, shareholders of the Fund would
become shareholders of Intermediate Series. No sales charges would be
imposed on the proposed transfer. The Fund anticipates obtaining an
opinion of its counsel that no gain or loss for federal income tax
purposes would be recognized by shareholders of the Fund as a result of
the proposed transaction.
AS OF CLOSE OF BUSINESS ON MAY 18, 1995 THE FUND NO LONGER ACCEPTS
PURCHASE ORDERS FOR SHARES OF EITHER CLASS, EXCEPT FOR PURCHASES BY
CERTAIN RETIREMENT AND EMPLOYEE PLANS (EXCLUDING IRA ACCOUNTS). Existing
shareholders may continue to acquire shares through dividend reinvestment
and the current exchange and redemption privileges will remain in effect
until the transaction is consummated. In the event that Fund shareholders
do not approve the proposed transaction, the Board of Directors will
consider appropriate action including, but not limited to, the public
offering of Fund shares.
2
<PAGE> 3
RISK FACTORS AND SPECIAL CHARACTERISTICS
In seeking to achieve its investment objective, the Fund will under normal
circumstances invest at least 65% of its assets in adjustable rate securities,
including mortgage-backed securities, obligations issued or guaranteed by the
U.S. Government, its agencies and instrumentalities and corporate and other debt
securities, all of which have their interest rates reset at periodic intervals.
The Fund may also invest up to 35% of its total assets in fixed rate securities.
The Fund expects that under normal conditions at least 75% of the value of the
securities purchased by the Fund (excluding options and futures) will be rated
"AA" or "AAA" by Standard & Poor's or "Aa" or "Aaa" by Moody's or, if unrated,
will be determined to be of comparable quality by the investment adviser. See
"How the Fund Invests--Investment Objective and Policies" at page 7. The Fund
may engage in short selling and use leverage, including reverse repurchase
agreements, dollar rolls and bank borrowings, which entails additional risks to
the Fund. The Fund may also engage in various derivative securities transactions
including the purchase and sale of put and call options on securities and
financial indices and futures contracts and related options. See "Other
Investments and Investment Techniques" at page 14.
WHO MANAGES THE FUND?
Prudential Mutual Fund Management, Inc. (PMF or the Manager) is the Manager
of the Fund and is compensated for its services at an annual rate of .50 of 1%
of the Fund's average daily net assets. As of March 31, 1995 PMF served as
manager or administrator to 68 investment companies, including 39 mutual funds,
with aggregate assets of approximately $46 billion. The Prudential Investment
Corporation (PIC or the Subadviser) furnishes investment advisory services in
connection with the management of the Fund under a Subadvisory Agreement with
PMF. See "How the Fund is Managed--Manager" at page 21.
WHO DISTRIBUTES THE FUND'S SHARES?
Prudential Mutual Fund Distributors, Inc. (PMFD) acts as the Distributor of
the Fund's Class A shares. The Class A Plan of Distribution provides that (i) up
to .25 of 1% of the average daily net assets of the Class A shares may be used
to pay for personal service and the maintenance of shareholder accounts (service
fee) and (ii) total distribution fees (including the service fee of .25 of 1%)
may not exceed .50 of 1%. PMFD is currently waiving all payments to it under the
Class A Plan of Distribution.
Prudential Securities Incorporated (Prudential Securities or PSI), a major
securities underwriter and securities and commodities broker, acts as the
Distributor of the Fund's Class B shares. Prudential Securities may be
reimbursed for its expenses related to the distribution of Class B shares at an
annual rate of up to .75 of 1% of the average daily net assets of the Class B
shares. The Fund may also pay Prudential Securities a service fee of up to .25
of 1% of the average daily net assets of the Class B shares. See "How the Fund
is Managed--Distributor" at page 22. Prudential Securities currently has no
costs reimbursable to it under the Fund's Class B Plan of Distribution and as a
consequence the Fund is currently not paying any 12b-1 fees on the Class B
shares. See "How the Fund is Managed--Distributor" at page 22.
3
<PAGE> 4
WHAT IS THE MINIMUM INVESTMENT?
The minimum initial investment is $5,000. The subsequent minimum investment
is $1,000. There is no minimum investment requirement for certain retirement and
employee savings plans or custodial accounts for the benefit of minors. For
purchases made through the Automatic Savings Accumulation Plan, the minimum
initial and subsequent investment is $50. See "Shareholder Guide--How to Buy
Shares of the Fund" at page 29 and "Shareholder Guide--Shareholder Services" at
page 36.
HOW DO I PURCHASE SHARES?
You may purchase shares of the Fund through Prudential Securities, Pruco
Securities Corporation (Prusec) or directly from the Fund, through its transfer
agent, Prudential Mutual Fund Services, Inc. (PMFS or the Transfer Agent) at the
net asset value per share (NAV) next determined after receipt of your purchase
order by the Transfer Agent or Prudential Securities plus a sales charge which
may be imposed either at the time of purchase or on a deferred basis. See "How
The Fund Values Its Shares" at page 25 and "Shareholder Guide--How to Buy Shares
of the Fund" at page 29.
WHAT ARE MY PURCHASE ALTERNATIVES?
The Fund offers two classes of shares which may be purchased at the next
determined NAV plus a sales charge which, at your election, may be imposed
either at the time of purchase (Class A shares) or on a deferred basis (Class B
shares).
- Class A shares are sold with an initial sales charge of up to 1.00% of
the offering price.
- Class B shares are sold without an initial sales charge but are subject
to a contingent deferred sales charge or CDSC of 1% which will be imposed
on redemptions made within one year of purchase. Class B shares will be
converted automatically into Class A shares after the one year contingent
deferred sales charge period has expired.
See "Shareholder Guide--Alternative Purchase Plan" at page 30 and
"Shareholder Guide--How to Sell Your Shares--Contingent Deferred Sales
Charge--Class B Shares" at page 35.
HOW DO I SELL MY SHARES?
You may redeem shares of the Fund at any time at the NAV next determined
after Prudential Securities or the Transfer Agent receives your sell order.
Although Class B shares are sold without an initial sales charge, the proceeds
or redemptions of Class B shares held for less than one year may be subject to a
contingent deferred sales charge of 1%. See "Shareholder Guide--How to Sell Your
Shares" at page 33.
HOW ARE DIVIDENDS AND DISTRIBUTIONS PAID?
The Fund expects to declare daily and pay dividends of net investment
income monthly and make distributions of any net capital gains at least
annually. Dividends and distributions will be reinvested automatically in
additional shares of the Fund at NAV without a sales charge unless you request
that they be paid to you in cash. See "Taxes, Dividends and Distributions" at
page 27.
4
<PAGE> 5
- --------------------------------------------------------------------------------
FUND EXPENSES
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES
(INITIAL SALES (DEFERRED SALES
CHARGE CHARGE
ALTERNATIVE) ALTERNATIVE)
------------ ------------
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES+
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price)................................... 1.00% None
Maximum Sales Load or Deferred Sales Load Imposed on Reinvested
Dividends............................................................. None None
Deferred Sales Load (as a percentage of original purchase price or
redemption proceeds, whichever is lower)*............................. None 1% during the
first year and
0% thereafter
Redemption Fees......................................................... None None
Exchange Fee............................................................ None None
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees......................................................... .50% .50%
12b-1 Fees*+ (before fee waiver)........................................ .50% 1.00%
Other Expenses.......................................................... .57% .53%
----- -----
Total Fund Operating Expenses (before fee waiver)**..................... 1.57% 2.03%
===== =====
</TABLE>
<TABLE>
<CAPTION>
1 3 5 10
EXAMPLE YEAR YEARS YEARS 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:
Class A.................................................................... $ 26 $ 59 $ 95 $ 195
Class B*................................................................... $ 16 $ 50 $ 86 $ 187
You would pay the following expenses on the same investment, assuming no
redemption:
Class A.................................................................... $ 26 $ 59 $ 95 $ 195
Class B*................................................................... $ 16 $ 50 $ 86 $ 187
</TABLE>
The example should not be considered a representation of future expenses. Actual
expenses may be greater or less than those shown.
The purpose of this table is to assist investors in understanding the
various costs and expenses that an investor in the Fund will bear, whether
directly or indirectly. For more complete descriptions of the various costs and
expenses, see "How the Fund is Managed." "Other Expenses" includes operating
expenses of the Fund, such as directors' and professional fees, registration
fees, reports to shareholders, transfer agency and custodian fees.
- ---------------
* The Distributor has temporarily and voluntarily agreed to waive all payments
to it under the Fund's Class A Distribution and Service Plan (Class A Plan).
Therefore, the Fund will not assess any 12b-1 fees on the Class A shares
unless and until payments are resumed to the Distributor under the Class A
Plan. In addition, the Distributor no longer has any costs reimbursable to it
under the Fund's Class B Distribution and Service Plan (Class B Plan).
Therefore, the Fund will not assess any 12b-1 fees on the Class B shares
unless and until payments are resumed to the Distributor under the Class B
Plan. Class B shares will be automatically converted to Class A shares after
the one year contingent deferred sales charge period has expired. See
"Shareholder Guide--Alternative Purchase Plan."
** Taking into account the current level of fees charged under the Fund's
Distribution and Service Plan, 12b-1 fees would be 0 and Total Fund Operating
Expenses would be 1.07% for Class A shares and 1.03% for Class B shares.
+ Pursuant to rules of the National Association of Securities Dealers, Inc.,
the aggregate initial sales charges, deferred sales charges and asset-based
sales charges on shares of the Fund may not exceed 6.25% of total gross
sales, subject to certain exclusions. This 6.25% limitation is imposed on the
Fund rather than on a per shareholder basis. See "How the Fund is
Managed--Distributor."
5
<PAGE> 6
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT THE INDICATED PERIODS)
THE FOLLOWING FINANCIAL HIGHLIGHTS HAVE BEEN AUDITED BY DELOITTE & TOUCHE LLP,
INDEPENDENT ACCOUNTANTS, WHOSE REPORT THEREON WAS UNQUALIFIED. THIS INFORMATION
SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL STATEMENTS AND NOTES THERETO,
WHICH APPEAR IN THE STATEMENT OF ADDITIONAL INFORMATION. THE FINANCIAL
HIGHLIGHTS CONTAIN SELECTED DATA FOR A SHARE OF COMMON STOCK OUTSTANDING, TOTAL
RETURN, RATIOS TO AVERAGE NET ASSETS AND OTHER SUPPLEMENTAL DATA FOR THE PERIODS
INDICATED. THIS INFORMATION IS BASED ON DATA CONTAINED IN THE FINANCIAL
STATEMENTS.
<TABLE>
<CAPTION>
CLASS A CLASS B
------------------------------------ ------------------------------------
JUNE 10, JUNE 10,
YEAR YEAR 1992* YEAR YEAR 1992*
ENDED ENDED THROUGH ENDED ENDED THROUGH
FEBRUARY FEBRUARY FEBRUARY FEBRUARY FEBRUARY FEBRUARY
28, 28, 28, 28, 28, 28,
1995 1994 1993 1995 1994 1993
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period............................. $ 9.63 $ 9.94 $ 10.00 $ 9.67 $ 9.94 $ 10.00
---------- ---------- ---------- ---------- ---------- ----------
Income from investment operations
Net investment income+............... .36 0.41 0.35 .36 0.41 0.31
Net realized and unrealized loss on
investment transactions............ (.07) (0.29) (0.05) (.08) (0.29) (0.05)
---------- ---------- ---------- ---------- ---------- ----------
Total from investment operations... .29 0.12 0.30 .28 0.12 0.26
Less distributions
Dividends from net investment
income............................. (.35) (0.41) (0.35) (.33) (0.41) (0.31)
Dividends in excess of net investment
income............................. (.01) (0.02) (0.01) (.03) (0.01) (0.01)
---------- ---------- ---------- ---------- ---------- ----------
Total distributions................ (.36) (0.43) (0.36) (.36) (0.42) (0.32)
---------- ---------- ---------- ---------- ---------- ----------
Contingent deferred sales charge
collected.......................... -- -- -- -- .03 --
---------- ---------- ---------- ---------- ---------- ----------
Net asset value, end of period....... $ 9.56 $ 9.63 $ 9.94 $ 9.59 $ 9.67 $ 9.94
========== ========== ========== ========== ========== ==========
TOTAL RETURN++....................... 3.07% 1.24% 2.92% 2.96% 1.58% 2.56%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)...... $ 58,710 $122,860 $219,352 $ 746 $ 5,312 $ 38,766
Average net assets (000)............. $ 89,069 $176,863 $217,329 $2,279 $ 19,742 $ 33,895
Ratios to average net assets+
Expenses, including distribution
fees............................. 1.07% 0.69% 0.77%** 1.03% 0.75% 1.27%**
Expenses, excluding distribution
fees............................. 1.07% 0.63% 0.27%** 1.03% 0.63% 0.27%**
Net investment income.............. 3.65% 4.29% 4.81%** 3.47% 4.23% 4.31%**
Portfolio turnover rate.............. 268% 130% 45% 268% 130% 45%
</TABLE>
- ---------------
* Commencement of investment operations.
** Annualized.
+ Net of management and/or distribution fee waivers.
++ Total return does not consider the effect of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestments of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
6
<PAGE> 7
- --------------------------------------------------------------------------------
HOW THE FUND INVESTS
INVESTMENT OBJECTIVE AND POLICIES
THE FUND'S INVESTMENT OBJECTIVE IS HIGH CURRENT INCOME CONSISTENT WITH LOW
VOLATILITY OF PRINCIPAL. THE FUND SEEKS TO ACHIEVE ITS OBJECTIVE BY INVESTING,
UNDER NORMAL CIRCUMSTANCES, AT LEAST 65% OF ITS TOTAL ASSETS IN ADJUSTABLE RATE
SECURITIES, INCLUDING MORTGAGE-BACKED SECURITIES ISSUED OR GUARANTEED BY PRIVATE
INSTITUTIONS OR THE U.S. GOVERNMENT, ITS AGENCIES OR INSTRUMENTALITIES,
ASSET-BACKED SECURITIES AND CORPORATE AND OTHER DEBT OBLIGATIONS. By investing
primarily in adjustable rate securities, all of which have their interest rates
reset at periodic intervals, the Fund seeks to achieve less volatility of
principal than a portfolio which invests exclusively in fixed rate securities.
THERE CAN BE NO ASSURANCE THAT THE FUND'S INVESTMENT OBJECTIVE WILL BE ACHIEVED.
See "Investment Objective and Policies" in the Statement of Additional
Information.
THE FUND MAY ALSO INVEST UP TO 35% OF ITS TOTAL ASSETS IN FIXED RATE
SECURITIES, INCLUDING MORTGAGE-BACKED SECURITIES, ASSET-BACKED SECURITIES,
OBLIGATIONS ISSUED OR GUARANTEED BY THE U.S. GOVERNMENT, ITS AGENCIES AND
INSTRUMENTALITIES AND CORPORATE AND OTHER DEBT OBLIGATIONS. THE FUND EXPECTS
THAT UNDER NORMAL MARKET CONDITIONS AT LEAST 75% OF THE VALUE OF THE SECURITIES
PURCHASED BY THE FUND (EXCLUDING OPTIONS AND FUTURES) WILL BE RATED "AA" OR
"AAA" BY STANDARD & POOR'S OR "Aa" OR "Aaa" BY MOODY'S OR, IF UNRATED, WILL BE
DETERMINED TO BE OF COMPARABLE QUALITY BY THE INVESTMENT ADVISER. THE FUND
EXPECTS THAT UNDER NORMAL MARKET CONDITIONS THE REMAINING 25% OF THE VALUE OF
THE SECURITIES PURCHASED BY THE FUND (EXCLUDING OPTIONS AND FUTURES) WILL BE
RATED "A" BY MOODY'S OR STANDARD & POOR'S OR, IF UNRATED, DETERMINED TO BE OF
COMPARABLE QUALITY BY THE INVESTMENT ADVISER. For temporary defensive purposes,
the Fund may invest up to 100% of its assets in cash, U.S. Government securities
and high quality money market instruments.
THE FUND MAY ALSO PURCHASE AND SELL PUT AND CALL OPTIONS ON SECURITIES AND
FINANCIAL INDICES AND ENGAGE IN TRANSACTIONS INVOLVING FUTURES CONTRACTS AND
RELATED OPTIONS. WHILE THESE OPTIONS AND FUTURES CONTRACTS ARE NOT THEMSELVES
RATED, THE SECURITIES ACQUIRED PURSUANT TO THESE OPTIONS AND FUTURES CONTRACTS
WILL BE RATED AT LEAST "A" BY STANDARD & POOR'S OR MOODY'S OR, IF UNRATED,
DETERMINED TO BE OF COMPARABLE QUALITY BY THE INVESTMENT ADVISER. IN ADDITION,
THE FUND MAY ENGAGE IN SHORT SELLING AND USE LEVERAGE, INCLUDING REVERSE
REPURCHASE AGREEMENTS, DOLLAR ROLLS AND BANK BORROWINGS.
THE FUND'S INVESTMENT OBJECTIVE IS A FUNDAMENTAL POLICY AND MAY NOT BE
CHANGED WITHOUT THE APPROVAL OF THE HOLDERS OF A MAJORITY OF THE FUND'S
OUTSTANDING VOTING SECURITIES, AS DEFINED IN THE INVESTMENT COMPANY ACT OF 1940,
AS AMENDED (THE INVESTMENT COMPANY ACT). THE FUND HAS ALSO ADOPTED A FUNDAMENTAL
POLICY TO INVEST AT LEAST 25% OF ITS ASSETS IN MORTGAGE-BACKED AND ASSET-BACKED
SECURITIES. FUND POLICIES THAT ARE NOT FUNDAMENTAL MAY BE CHANGED BY THE BOARD
OF DIRECTORS.
ADJUSTABLE RATE SECURITIES
ADJUSTABLE RATE SECURITIES ARE DEBT SECURITIES HAVING INTEREST RATES WHICH
ARE ADJUSTED OR RESET AT PERIODIC INTERVALS RANGING FROM ONE MONTH TO THREE
YEARS. The interest rate of an
7
<PAGE> 8
adjustable rate security typically responds to changes in general market levels
of interest. The interest paid on any particular adjustable rate security is a
function of the index upon which the interest rate of that security is based.
There are three main categories of indices: (i) those based on U.S. Treasury
securities, (ii) those derived from a calculated measure such as a cost of funds
index and (iii) those based on a moving average of mortgage rates. Commonly
utilized indices include, for example, the 1-year, 3-year and 5-year constant
maturity Treasury rate, the 3-month and 6-month T-bill rate, 1-month, 6-month or
1-year London Interbank Offered Rate (LIBOR), the Federal Home Loan Bank Cost of
Funds, the prime rate and commercial paper rates.
THE ADJUSTABLE RATE FEATURE OF THE SECURITIES IN WHICH THE FUND MAY INVEST
WILL TEND TO REDUCE SHARP CHANGES IN THE FUND'S NET ASSET VALUE IN RESPONSE TO
NORMAL INTEREST RATE FLUCTUATIONS. As the coupon rates of the Fund's adjustable
rate securities are reset periodically, yields of these portfolio securities
will reflect changes in market rates and should cause the net asset value of the
Fund's shares to fluctuate less dramatically than that of a fund invested in
long-term fixed rate securities. However, while the adjustable rate feature of
such securities will tend to limit sharp swings in the Fund's net asset value in
response to movements in general market interest rates, it is anticipated that
during periods of fluctuations in interest rates, the net asset value of the
Fund will fluctuate.
ADJUSTABLE RATE SECURITIES ALLOW THE FUND TO PARTICIPATE IN INCREASES IN
INTEREST RATES THROUGH PERIODIC INTEREST RATE ADJUSTMENTS RESULTING IN BOTH
HIGHER YIELDS AND LOWER PRICE FLUCTUATIONS. DURING PERIODS OF DECLINING INTEREST
RATES, COUPON RATES MAY READJUST DOWNWARD RESULTING IN LOWER YIELDS TO THE FUND.
The value of an adjustable rate security is unlikely to rise during periods of
declining interest rates to the same extent as fixed rate instruments. With
mortgage-backed securities, interest rate declines may result in accelerated
prepayment of mortgages with the result that proceeds from prepayments will be
reinvested at lower interest rates. During periods of rising interest rates,
changes in the coupon rate will lag behind changes in the market rate resulting
in a lower net asset value until the coupon resets to market rates. Investors
who sell shares before the interest rates in portfolio securities are adjusted
could suffer some loss of principal. Adjustable rate securities are also
typically subject to maximum increases and decreases in the interest rate
adjustment which can be made on any one adjustment date, in any one year, or
during the life of the security. In the event of dramatic increases or decreases
in prevailing market interest rates, the value of the Fund may fluctuate more
substantially since these limits may prevent the security from fully adjusting
its interest rate to the prevailing market rates.
U.S. GOVERNMENT SECURITIES
The Fund invests in adjustable rate and fixed rate U.S. Government
securities.
U.S. TREASURY SECURITIES
THE FUND 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. U.S. Treasury securities are generally fixed rate securities.
8
<PAGE> 9
SECURITIES ISSUED OR GUARANTEED BY U.S. GOVERNMENT AGENCIES AND
INSTRUMENTALITIES
THE FUND WILL INVEST IN BOTH ADJUSTABLE RATE AND FIXED RATE SECURITIES
ISSUED OR GUARANTEED BY AGENCIES OR INSTRUMENTALITIES OF THE U.S. GOVERNMENT,
INCLUDING, BUT NOT LIMITED TO, GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA),
FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) AND FEDERAL HOME LOAN MORTGAGE
CORPORATION (FHLMC) SECURITIES. Obligations of GNMA, the Farmers Home
Administration and the Export-Import 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 Fund 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 may also issue collateralized mortgage
obligations. See "How the Fund Invests--Collateralized Mortgage Obligations and
Multiclass Pass-Through Securities" below.
THE FUND MAY INVEST IN COMPONENT PARTS OF U.S. GOVERNMENT SECURITIES,
NAMELY EITHER THE CORPUS (PRINCIPAL) OF SUCH OBLIGATIONS OR ONE 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
Fund may also invest in custodial receipts held by a third party that are not
U.S. Government securities. See "Other Investments" in the Statement of
Additional Information.
MORTGAGE-RELATED SECURITIES ISSUED OR GUARANTEED BY U.S. GOVERNMENT
AGENCIES AND INSTRUMENTALITIES
THE FUND WILL 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. See "How the Fund
Invests--Mortgage-Backed Securities" below. 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 Fund's 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 "How the Fund
Invests--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 FUND MAY ALSO INVEST IN CERTAIN MORTGAGE
PASS-THROUGH SECURITIES ISSUED BY THE U.S. GOVERNMENT OR ITS AGENCIES AND
INSTRUMENTALITIES COMMONLY REFERRED TO AS MORTGAGE-BACKED SECURITY STRIPS OR MBS
9
<PAGE> 10
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 Fund 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.
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 FUND WILL 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.
10
<PAGE> 11
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 pass-through
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 FUND 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.
11
<PAGE> 12
In reliance on rules and interpretations of the Securities and Exchange
Commission (SEC), the Fund's 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 Additional
Information.
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 FUND MAY PURCHASE MBS STRIPS
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 Fund Invests--U.S. Government
Securities--Mortgage Related Securities Issued by U.S. Government Agencies and
Instrumentalities."
CORPORATE AND OTHER DEBT OBLIGATIONS
THE FUND 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 FUND'S 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 FUND 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 Fund 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
12
<PAGE> 13
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 Fund 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 prepaid at any time. As a result, if the Fund
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 Fund purchases these securities at a discount, faster than
expected prepayments will increase, while slower than expected prepayments will
reduce, yield to maturity. The Fund 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 subject to a higher risk of default than are other types of
mortgage-backed securities. See "Additional Investment Information" 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 and Standard & Poor's. See "Asset-Backed Securities."
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 Fund 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
13
<PAGE> 14
benefit less than other fixed income securities from declining interest rates
because of the risk of prepayment.
MONEY MARKET INSTRUMENTS
THE FUND 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 AND INSTRUMENTALITIES. These obligations will be U.S. dollar
denominated. Commercial paper will be rated, at the time of purchase, at least
"A-2" by Standard & Poor's 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 Standard & Poor's or "A" or "Prime-2" by Moody's.
OTHER INVESTMENTS AND INVESTMENT TECHNIQUES
The Fund 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.
HEDGING AND INCOME ENHANCEMENT STRATEGIES
THE FUND MAY ENGAGE IN VARIOUS PORTFOLIO STRATEGIES, INCLUDING DERIVATIVE
SECURITIES TRANSACTIONS, 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 THEREON. THE FUND'S ABILITY TO USE THESE
STRATEGIES MAY BE LIMITED BY MARKET CONDITIONS, REGULATORY LIMITS AND TAX
CONSIDERATIONS AND THERE CAN BE NO ASSURANCE THAT ANY OF THESE STRATEGIES WILL
SUCCEED. See "Investment Objective and Policies" in the Statement of Additional
Information. New financial products and risk management techniques continue to
be developed and the Fund may use these new investments and techniques to the
extent consistent with its investment objective and policies.
OPTIONS TRANSACTIONS
THE FUND MAY PURCHASE AND WRITE (I.E., SELL) PUT AND CALL OPTIONS ON
SECURITIES AND FINANCIAL INDICES THAT ARE TRADED ON NATIONAL SECURITIES
EXCHANGES OR IN THE OVER-THE-COUNTER MARKET TO ENHANCE INCOME OR TO HEDGE THE
FUND'S 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 "Additional
Risks--Options on Securities" in the Statement of Additional Information. The
Fund may write covered put and call options to generate additional income
through the receipt of premiums, purchase put options in an effort to protect
the value of a security that it owns against a decline in market value and
purchase
14
<PAGE> 15
call options in an effort to protect against an increase in price of securities
it intends to purchase. The Fund may also purchase put and call options to
offset previously written put and call options of the same series. See
"Investment Objective and Policies--Additional Investment Policies--Options on
Securities" in the Statement of Additional Information. As an operating policy,
the Fund may invest up to 5% of its total assets in listed and over-the-counter
call and put options on U.S. Government securities and mortgage-backed
securities. The Fund may also purchase call and put 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 Fund writes a call option, the Fund
gives up the potential for gain on the underlying securities or currency in
excess of the exercise price of the option during the period that the option is
open.
A PUT OPTION GIVES THE PURCHASER, IN RETURN FOR A PREMIUM, THE RIGHT, FOR A
SPECIFIED PERIOD OF TIME, TO SELL THE SECURITIES 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 Fund
might, therefore, be obligated to purchase the underlying securities for more
than their current market price.
THE FUND WILL WRITE ONLY "COVERED" OPTIONS. An option is covered if, so
long as the Fund is obligated under the option, it owns an offsetting position
in the underlying security or 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--Additional Investment Policies" in the Statement of Additional
Information.
THERE IS NO LIMITATION ON THE AMOUNT OF CALL OPTIONS THE FUND MAY WRITE.
THE FUND MAY ONLY WRITE COVERED PUT OPTIONS TO THE EXTENT THAT COVER FOR SUCH
OPTIONS DOES NOT EXCEED 25% OF THE FUND'S NET ASSETS. THE FUND 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 FUND MAY PURCHASE AND SELL FINANCIAL FUTURES CONTRACTS AND OPTIONS
THEREON WHICH ARE TRADED ON A COMMODITIES EXCHANGE OR BOARD OF TRADE FOR CERTAIN
HEDGING, RETURN ENHANCEMENT AND RISK MANAGEMENT PURPOSES 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 OR CURRENCIES AT
A SET PRICE FOR DELIVERY IN THE FUTURE.
15
<PAGE> 16
THE FUND 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 FUND'S EXISTING FUTURES AND OPTIONS ON
FUTURES AND PREMIUMS PAID FOR SUCH RELATED OPTIONS WOULD EXCEED 5% OF THE
LIQUIDATION VALUE OF THE FUND'S TOTAL ASSETS.
THE FUND'S 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 Fund.
THE FUND'S 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 FUND 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 Fund may leave the Fund 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 Fund to purchase or sell a portfolio security at a time that
otherwise would be favorable for it to do so, or the possible need for the Fund
to sell the security at a disadvantageous time, due to the requirement that the
Fund to maintain "cover" or to segregate securities in connection with hedging
transactions. See "Investment Objective and Policies" and "Taxes" in the
Statement of Additional Information.
REPURCHASE AGREEMENTS
The Fund may on occasion enter into repurchase agreements, whereby the
seller of a security agrees to repurchase that security from the Fund at a
mutually agreed-upon time and price. The repurchase date is usually within a day
or two of the original purchase, although it may not be a number of months. The
resale price is in excess of the purchase price, reflecting an agreed-upon rate
of return effective for the period of time the Fund's money is invested in the
security. The Fund's 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
16
<PAGE> 17
held as collateral are valued daily, and if the value of such instruments
declines, the Fund will require additional collateral. If the seller defaults
and the value of the collateral securing the repurchase agreement declines, the
Fund may incur a loss. In the event of a default or bankruptcy of a seller, the
Fund will promptly seek to liquidate the collateral. To the extent that the
proceeds from any sale of such collateral upon a default in the obligations to
repurchase are less than the repurchase price, the Fund will suffer a loss. The
Fund participates in a joint repurchase account with other investment companies
managed by Prudential Mutual Fund Management, Inc. pursuant to an order of the
Securities and Exchange Commission (SEC). See "Investment Objective and
Policies-- Repurchase Agreements" in the Statement of Additional Information.
REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLLS
Reverse repurchase agreements involve sales by the Fund of portfolio assets
concurrently with an agreement by the Fund to repurchase the same assets at a
later date at a fixed price. During the reverse repurchase agreement period, the
Fund continues to receive principal and interest payments on these securities.
The Fund may enter into dollar rolls in which the Fund 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 Fund forgoes principal and
interest paid on the securities. The Fund 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. A "covered roll" is a specific type of dollar roll
for which there is an offsetting cash position or a cash equivalent security
position which matures on or before the forward settlement date of the dollar
roll transaction.
The Fund 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 Fund
may decline below the price of the securities the Fund has sold but is obligated
to repurchase under the agreement. In the event the buyer of securities under a
reverse repurchase agreement or dollar roll files for bankruptcy or becomes
insolvent, the Fund's 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 Fund's obligation to repurchase the securities.
Reverse repurchase agreements and dollar rolls are speculative techniques
involving leverage and are considered borrowings by the Fund for purposes of the
percentage limitations applicable to borrowings. See "How the Fund
Invests--Borrowings" below.
SECURITIES LENDING
The Fund may lend its portfolio securities to brokers or dealers, banks or
other recognized institutional borrowers of securities, provided that the
borrower at all times maintains cash or equivalent collateral or secures a
letter of credit in favor of the Fund in an amount equal to at least 100% of the
market value of the securities loaned. During the time portfolio securities are
on loan,
17
<PAGE> 18
the borrower will pay the Fund an amount equivalent to any dividend or interest
paid on such securities and the Fund may invest the cash collateral and earn
additional income, or it may receive an agreed-upon amount of interest income
from the borrower who has delivered cash equivalent collateral or secured a
letter of credit. Loans are subject to termination at the option of the Fund or
the borrower. As with any extension 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. The Fund may pay reasonable
administration and custodial fees in connection with a loan. As a matter of
fundamental policy, the Fund cannot lend more than 33 1/3% of the value of its
total assets.
SHORT SALES
The Fund may sell a security it does not own in anticipation of a decline
in the market value of that security ("short sales"). To complete the
transaction, the Fund will borrow the security to make delivery to the buyer.
The Fund 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 Fund. Until the
security is replaced, the Fund is required to pay to the lender any interest
which accrues during the period of the loan. To borrow the security, the Fund
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 Fund replaces the borrowed security, it will (a) maintain in a
segregated account cash or U.S. Government 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 Fund 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 Fund replaces the borrowed security. The Fund 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 Fund's 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 Fund may also make short sales against-the-box 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 Fund 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 Fund may purchase or sell securities on a when-issued or delayed
delivery basis. When-issued or delayed delivery transactions arise when
securities are purchased or sold by the Fund with payment and delivery taking
place in the future in order to secure what is considered to be an
18
<PAGE> 19
advantageous price and yield to the Fund at the time of entering into the
transaction. The Fund's Custodian will maintain, in a segregated account of the
Fund, cash, U.S. Government securities or other liquid high-grade debt
obligations having a value equal to or greater than the Fund's 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 this period. At the time of
delivery of the securities, the value may be more or less than the purchase
price and an increase in the percentage of the Fund's assets committed to the
purchase of securities on a when-issued or delayed delivery basis may increase
the volatility of the Fund's net asset value.
INTEREST RATE SWAP TRANSACTIONS
The Fund may enter into interest rate swaps. Interest rate swaps involve
the exchange by the Fund 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 Fund 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 Fund 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 Fund 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 Fund would diminish
compared to what it would have been if this investment technique was never used.
ILLIQUID SECURITIES
The Fund 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 other 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), and privately placed commercial paper
that have a readily available market are not considered illiquid for purposes of
this limitation. The investment adviser will monitor the liquidity of such
restricted securities under the supervision of the Board of Directors.
Repurchase agreements subject to demand are deemed to have a maturity equal to
the applicable notice period.
The staff of the SEC has taken the position that purchased over-the-counter
options and the assets used as "cover" for written over-the-counter options are
illiquid securities unless the Fund and the counterparty have provided for the
Fund at the Fund's option to unwind the over-the-counter option. The exercise of
such an option ordinarily would involve the payment by the Fund of an amount
designed to reflect the counterparty's economic loss from an early termination,
but does allow the Fund to treat the assets used as "cover" as "liquid."
19
<PAGE> 20
When the Fund enters into interest rate swaps on other than a net basis,
the entire amount of the Fund's obligations, if any, with respect to such
interest rate swaps will be treated as illiquid. To the extent that the Fund
enters into interest rate swaps on a net basis, the net amount of the excess, if
any, of the Fund's obligations over its entitlements with respect to each
interest rate swap will be treated as illiquid. The Fund will also treat
non-U.S. Government POs and IOs as illiquid securities so long as the staff of
the SEC maintains its position that such securities are illiquid.
PORTFOLIO TURNOVER
The Fund has no policy with respect to portfolio turnover. The investment
adviser expects that, under normal circumstances, the Fund's annual portfolio
turnover rate will not exceed 200%. The portfolio turnover rate is calculated by
dividing the lesser of sales or purchases of portfolio securities by the average
monthly value of the Fund's portfolio securities, excluding securities having a
maturity at the date of purchase of one year or less. While the Fund will pay
commissions in connection with options and futures transactions, the securities
in which it invests are generally traded on a "net" basis with dealers acting as
principals for their own account without a stated commission. Nevertheless, high
portfolio turnover (over 100%) may involve correspondingly greater brokerage
commissions and other transaction costs which will be borne directly by the
Fund. Higher portfolio turnover results in increased costs to the Fund and
therefore to the Fund's shareholders. See "Portfolio Transactions and Brokerage"
in the Statement of Additional Information. In addition, high portfolio turnover
may result in increased short-term capital gains which, when distributed to
shareholders, are treated as ordinary income. See "Taxes, Dividends and
Distributions."
BORROWING
The Fund 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 Fund may pledge up to 33 1/3% of its
total assets to secure these borrowings. If the Fund's asset coverage for
borrowings falls below 300%, the Fund will take prompt action to reduce its
borrowings. If the Fund borrows to invest in securities, any investment gains
made on the securities in excess of interest paid on the borrowing will cause
the net asset value of the Fund's shares to rise faster than would otherwise be
the case. On the other hand, if the investment performance of the additional
securities purchased fails to cover their cost (including any interest paid on
the money borrowed) to the Fund, the net asset value of the Fund's shares will
decrease faster than would otherwise be the case. This is the speculative
characteristic known as "leverage." Reverse repurchase agreements, dollar rolls
and short sales also include leverage and are considered borrowings by the Fund
for purposes of the percentage limitations applicable to borrowings. See
"Reverse Repurchase Agreements and Dollar Rolls" and "Short Sales" above.
INVESTMENT RESTRICTIONS
The Fund is subject to certain investment restrictions which, like its
investment objective, constitute fundamental policies. Fundamental policies
cannot be changed without the approval of the holders of a majority of the
Fund's outstanding voting securities, as defined in the Investment Company Act.
See "Investment Restrictions" in the Statement of Additional Information.
20
<PAGE> 21
- --------------------------------------------------------------------------------
HOW THE FUND IS MANAGED
THE FUND HAS A BOARD OF DIRECTORS WHICH, IN ADDITION TO OVERSEEING THE
ACTIONS OF THE FUND'S MANAGER, SUBADVISER AND DISTRIBUTOR, AS SET FORTH BELOW,
DECIDES UPON MATTERS OF GENERAL POLICY. THE FUND'S MANAGER CONDUCTS AND
SUPERVISES THE DAILY BUSINESS OPERATIONS OF THE FUND. THE FUND'S SUBADVISER
FURNISHES DAILY INVESTMENT ADVISORY SERVICES.
FOR THE YEAR ENDED FEBRUARY 28, 1995, THE TOTAL EXPENSES AS A PERCENTAGE OF
AVERAGE NET ASSETS FOR THE FUND'S CLASS A AND CLASS B SHARE WERE 1.07% (NET OF
MANAGEMENT FEE WAIVER) AND 1.03%, RESPECTIVELY. SEE "FINANCIAL HIGHLIGHTS" AND
"FEE WAIVERS AND SUBSIDY."
MANAGER
PRUDENTIAL MUTUAL FUND MANAGEMENT, INC. (PMF OR THE MANAGER), ONE SEAPORT
PLAZA, NEW YORK, NEW YORK 10292, IS THE MANAGER OF THE FUND AND IS COMPENSATED
FOR ITS SERVICES AT AN ANNUAL RATE OF .50 OF 1% OF THE FUND'S AVERAGE DAILY NET
ASSETS. PMF was incorporated in May 1987 under the laws of the State of
Delaware.
For the period ended February 28, 1995 the fund paid management fees to PMF
of $456,738 (.50% of average daily net assets).
As of March 31, 1995, PMF served as the manager to 39 open-end investment
companies, constituting all of the Prudential Mutual Funds, and as manager or
administrator of 29 closed-end investment companies, with aggregate assets of
approximately $46 billion.
UNDER THE MANAGEMENT AGREEMENT WITH THE FUND, PMF MANAGES THE INVESTMENT
OPERATIONS OF THE FUND AND ALSO ADMINISTERS THE FUND'S CORPORATE AFFAIRS. See
"Manager" in the Statement of Additional Information.
UNDER THE SUBADVISORY AGREEMENT BETWEEN PMF AND THE PRUDENTIAL INVESTMENT
CORPORATION (PIC OR THE SUBADVISER), PIC FURNISHES INVESTMENT ADVISORY SERVICES
IN CONNECTION WITH THE MANAGEMENT OF THE FUND AND IS REIMBURSED BY PMF FOR ITS
REASONABLE COSTS AND EXPENSES INCURRED IN PROVIDING SUCH SERVICES. Under the
Management Agreement, PMF continues to have responsibility for all investment
advisory services and supervises PIC's performance of such services.
The current portfolio manager of the Fund is Barbara L. Kenworthy, a
managing director and senior portfolio manager of Prudential Investment
Advisors, a unit of PIC. She is responsible for the day to day management of the
portfolio and has managed the Fund's portfolio since May 1995. Ms. Kenworthy
joined PIC in July 1994, having previously been employed by The Dreyfus
Corporation (from June 1985 to June 1994) where she served as president and
portfolio manager for several Dreyfus fixed-income funds. Ms. Kenworthy also
serves as the portfolio manager of other investment companies advised by PIC.
PMF and PIC are indirect, wholly-owned subsidiaries of The Prudential
Insurance Company of America (Prudential), a major diversified insurance and
financial services company.
21
<PAGE> 22
FEE WAIVERS AND SUBSIDY
PMF may from time to time waive all or a portion of its management fee and
subsidize all or a portion of the operating expenses of the Fund. Fee waivers
and expense subsidies will increase the Fund's yield and total return. See
"Performance Information" and "Fund Expenses." The Distributors may also from
time to time waive all or a portion of the distribution expenses reimbursable to
them under the Fund's Distribution and Service Plans, see "Distributor." Any fee
waiver or subsidy may be terminated at any time without notice after which the
Fund's expenses will increase and its yield and total return will be reduced.
DISTRIBUTOR
PRUDENTIAL MUTUAL FUND DISTRIBUTORS, INC. (PMFD), 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 CLASS A SHARES OF THE FUND. IT IS
A WHOLLY-OWNED SUBSIDIARY OF PMF.
PRUDENTIAL SECURITIES INCORPORATED (PRUDENTIAL SECURITIES OR PSI), ONE
SEAPORT PLAZA, NEW YORK, NEW YORK 10292, IS A CORPORATION ORGANIZED UNDER THE
LAWS OF THE STATE OF DELAWARE AND SERVES AS THE DISTRIBUTOR OF THE CLASS B
SHARES OF THE FUND. IT IS AN INDIRECT, WHOLLY-OWNED SUBSIDIARY OF PRUDENTIAL.
UNDER SEPARATE DISTRIBUTION AND SERVICE PLANS (THE CLASS A PLAN AND THE
CLASS B PLAN, COLLECTIVELY THE PLANS) ADOPTED BY THE FUND UNDER RULE 12b-1 UNDER
THE INVESTMENT COMPANY ACT AND SEPARATE DISTRIBUTION AGREEMENTS (THE
DISTRIBUTION AGREEMENTS), PMFD AND PRUDENTIAL SECURITIES (COLLECTIVELY THE
DISTRIBUTOR) INCUR THE EXPENSES OF DISTRIBUTING THE FUND'S CLASS A AND CLASS B
SHARES, RESPECTIVELY. These expenses include commissions and account servicing
fees paid to, or on account of, financial advisers of Prudential Securities and
Pruco Securities Corporation (Prusec), an affiliated broker-dealer, commissions
and account servicing fees paid to, or on account of, other broker-dealers or
financial institutions (other than national banks) which have entered into
agreements with the Distributor, advertising expenses, the cost of printing and
mailing prospectuses to potential investors and indirect and overhead costs of
Prudential Securities and Prusec associated with the sale of Fund shares,
including lease, utility, communications and sales promotion expenses. The State
of Texas requires that shares of the Fund may be sold in that state only by
dealers or other financial institutions which are registered there as
broker-dealers.
UNDER THE CLASS A PLAN, THE FUND MAY REIMBURSE PMFD FOR ITS
DISTRIBUTION-RELATED EXPENSES WITH RESPECT TO CLASS A SHARES AT AN ANNUAL RATE
OF UP TO .50 OF 1% OF THE AVERAGE DAILY NET ASSET VALUE OF THE CLASS A SHARES.
The Class A Plan provides that (i) up to .25 of 1% of the average daily net
assets of the Class A shares may be used to pay for personal service and the
maintenance of shareholder accounts (service fee) and (ii) total distribution
fees (including the service fee of .25 of 1%) may not exceed .50 of 1%. Unlike
the Class B Plan, there are no carry forward amounts under the Class A Plan and
interest expenses are not incurred under the Class A Plan.
For the fiscal year ended February 28, 1995, PMFD incurred
distribution-related expenses under the Class A Plan of $445,344 (0.50% of
average daily net assets of Class A shares). In addition, for this period, PMFD
received approximately $1,900 in initial sales charges. PMFD has agreed to
waive, temporarily and voluntarily, all payments to it under the Class A Plan.
Therefore, the Fund did not pay any distribution expenses to PMFD for the fiscal
year ended February 28, 1995.
22
<PAGE> 23
In addition, the Fund has discontinued assessing 12b-1 fees on the Class A
shares and will not resume assessing such fees unless and until payments are
resumed to PMFD under the Class A Plan. PMFD may terminate its waiver of
payments under the Class A Plan at any time and, in such event, the Fund will
once again assess 12b-1 fees on the Class A shares.
UNDER THE CLASS B PLAN, THE FUND REIMBURSES PRUDENTIAL SECURITIES FOR ITS
DISTRIBUTION-RELATED EXPENSES WITH RESPECT TO CLASS B SHARES (ASSET-BASED SALES
CHARGES) AT AN ANNUAL RATE OF UP TO .75 OF 1% OF THE AVERAGE DAILY NET ASSETS OF
THE CLASS B SHARES. Prudential Securities recovers the distribution expenses it
incurs through the receipt of reimbursement payments from the Fund under the
Class B Plan and the receipt of contingent deferred sales charges from certain
redeeming shareholders. See "Shareholder Guide--How to Sell Your
Shares--Contingent Deferred Sales Charge--Class B Shares." For the fiscal year
ended February 28, 1995, Prudential Securities received approximately $5,000 in
contingent deferred sales charges.
THE CLASS B PLAN ALSO PROVIDES FOR THE PAYMENT OF A SERVICE FEE TO
PRUDENTIAL SECURITIES AT A RATE NOT TO EXCEED .25 OF 1% OF THE AVERAGE DAILY NET
VALUE OF THE CLASS B SHARES. The service fee is used to pay financial advisers
for personal service and/or the maintenance of shareholder accounts.
Actual distribution expenses (asset-based sales charges) for Class B shares
for any given year may exceed the fees received pursuant to the Class B Plan and
will be carried forward and paid by the Fund in future years so long as the
Class B Plan is in effect. Interest is accrued monthly on such carry forward
amounts at a rate comparable to that paid by Prudential Securities for bank
borrowings. See "Distributor" in the Statement of Additional Information.
THE AGGREGATE DISTRIBUTION FEE FOR CLASS B SHARES (ASSET-BASED SALES
CHARGES PLUS SERVICE FEES) WILL NOT EXCEED THE ANNUAL RATE OF 1% OF THE AVERAGE
DAILY NET ASSET VALUE OF CLASS B SHARES UNDER THE CLASS B PLAN.
For the fiscal year ended February 28, 1995, Prudential Securities did not
assess its distribution fee under the Class B Plan since, as of April 14, 1993,
the Distributor no longer had any distribution expenses not yet reimbursed by
the Fund or recovered through contingent deferred sales charges. Therefore the
Fund did not pay any distribution expenses to PSI for the fiscal year ended
February 28, 1995. In addition, the Fund has discontinued assessing any 12b-1
fees on the Class B shares and will not resume assessing 12b-1 fees on the Class
B shares unless and until the Distributor incurs additional costs reimbursable
to it under the Class B Plan. Until such time, all contingent deferred sales
charges collected on the redemption of Class B shares will be paid to the Fund.
Distribution expenses attributable to the sale of both Class A and Class B
shares will be allocated to each class based upon the ratio of sales of each
class to the sales of all shares of the Fund. The Fund records all payments, if
any, made under the Plans as expenses in the calculation of net investment
income. The distribution fee and initial sales charge in the case of Class A
shares will not be used to subsidize the sale of Class B shares. Similarly, the
distribution fee and contingent deferred sales charge in the case of Class B
shares will not be used to subsidize the sale of Class A shares.
23
<PAGE> 24
Each Plan provides that it shall continue in effect from year to year
provided that a majority of the Board of Directors of the Fund, including a
majority of the Directors who are not "interested persons" of the Fund (as
defined in the Investment Company Act) and who have no direct or indirect
financial interest in the operation of the Plan or any agreement related to the
Plan (the Rule 12b-1 Directors), vote annually to continue the Plan. Each Plan
may be terminated at any time by vote of a majority of the Rule 12b-1 Directors
or of a majority of the outstanding shares of the applicable class of the Fund.
In the event of termination or discontinuation of the Class B Plan, the Board of
Directors may consider the appropriateness of having the Fund reimburse
Prudential Securities for the outstanding carry forward amounts plus interest
thereon.
In addition to distribution and service fees paid by the Fund under the
Class A and Class B Plans, the Manager (or one of its affiliates) may make
payments out of its own resources to dealers and other persons which distribute
shares of the Fund. Such payments may be calculated by reference to the net
asset value of shares sold by such persons or otherwise.
The Distributor is subject to the rules of the National Association of
Securities Dealers, Inc. (NASD) governing maximum sales charges. See
"Distributor" in the Statement of Additional Information.
On October 21, 1993, PSI entered into an omnibus settlement with the SEC,
state securities regulators (with the exception of the Texas Securities
Commissioner who joined the settlement on January 18, 1994) and the NASD to
resolve allegations that from 1980 through 1990 PSI sold certain limited
partnership interests in violation of securities laws to persons for whom such
securities were not suitable and misrepresented the safety, potential returns
and liquidity of these investments. Without admitting or denying the allegations
asserted against it, PSI consented to the entry of an SEC Administrative Order
which stated that PSI's conduct violated the federal securities laws, directed
PSI to cease and desist from violating the federal securities laws, pay civil
penalties, and adopt certain remedial measures to address the violations.
Pursuant to the terms of the SEC settlement, PSI agreed to the imposition
of a $10,000,000 civil penalty, established a settlement fund in the amount of
$330,000,000 and procedures to resolve legitimate claims for compensatory
damages by purchasers of the partnership interests. PSI has agreed to provide
additional funds, if necessary, for the purpose of the settlement fund. PSI's
settlement with the state securities regulators included an agreement to pay a
penalty of $500,000 per jurisdiction. PSI consented to a censure and to the
payment of a $5,000,000 fine in settling the NASD action.
In October 1994, a criminal complaint was filed with the United States
Magistrate for the Southern District of New York alleging that PSI committed
fraud in connection with the sale of certain limited partnership interests in
violation of federal securities laws. An agreement was simultaneously filed to
defer prosecution of these charges for a period of three years from the signing
of the agreement, provided that PSI complies with the terms of the agreement.
If, upon completion of the three year period, PSI has complied with the terms of
the agreement, no prosecution will be instituted by the United States for the
offenses charged in the complaint. If on the other hand, during the course of
the three year period, PSI violates the terms of the agreement, the U.S.
Attorney can then elect to pursue these charges. Under the terms of the
agreement, PSI
24
<PAGE> 25
agreed, among other things, to pay an additional $330,000,000 into the fund
established by the SEC to pay restitution to investors who purchased certain PSI
limited partnership interests.
For more detailed information concerning the foregoing matters, see
"Distributor" in the Statement of Additional Information, a copy of which may be
obtained at no cost by calling 1-800-225-1852.
The Fund is not affected by PSI's financial condition and is an entirely
separate legal entity from PSI, which has no beneficial ownership therein and
the Fund's assets which are held by State Street Bank and Trust Company, an
independent custodian, are separate and distinct from PSI.
PORTFOLIO TRANSACTIONS
Prudential Securities may act as a broker or futures commission merchant
for the Fund provided that the commissions, fees or other remuneration received
by Prudential Securities are fair and reasonable. See "Portfolio Transaction and
Brokerage" in the Statement of Additional Information.
CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, serves as Custodian for the Fund's portfolio securities and
cash and, in that capacity, maintains certain financial and accounting books and
records pursuant to an agreement with the Fund. Its mailing address is P.O. Box
9131, Boston, Massachusetts 02205.
Prudential Mutual Fund Services, Inc. (PMFS), Raritan Plaza One, Edison,
New Jersey 08837, serves as Transfer Agent and Dividend Disbursing Agent and in
those capacities maintains certain books and records for the Fund. PMFS is a
wholly-owned subsidiary of PMF. Its mailing address is P.O. Box 15005, New
Brunswick, New Jersey 08906-5005.
- --------------------------------------------------------------------------------
HOW THE FUND VALUES ITS SHARES
THE FUND'S NET ASSET VALUE PER SHARE OR NAV IS DETERMINED BY SUBTRACTING
ITS LIABILITIES FROM THE VALUE OF ITS ASSETS AND DIVIDING THE REMAINDER BY THE
NUMBER OF OUTSTANDING SHARES OF THE FUND. NAV IS CALCULATED SEPARATELY FOR EACH
CLASS. THE BOARD OF DIRECTORS HAS FIXED THE SPECIFIC TIME OF DAY FOR THE
COMPUTATION OF THE FUND'S NET ASSET VALUE TO BE AS OF 4:15 P.M., NEW YORK TIME.
Portfolio securities are valued based on market quotations or, if not
readily available, at fair value as determined in good faith under procedures
established by the Fund's Board of Directors. See "Net Asset Value" in the
Statement of Additional Information.
The Fund will compute its NAV once daily on days that the New York Stock
Exchange is open for trading except on days on which no orders to purchase, sell
or redeem shares have been received by the Fund or days on which changes in the
value of the Fund's portfolio securities do not materially affect the NAV. The
New York Stock Exchange is closed on the following holidays:
25
<PAGE> 26
New Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day and Christmas Day.
Although the legal rights of Class A and Class B shares are substantially
identical, the different expenses borne by each class may result in different
NAVs and dividends. As long as the Fund declares dividends daily, the NAV of
Class A and B shares will generally be the same. It is expected, however, that
the Fund's dividends will differ by approximately the amount of the distribution
expense accrual differential between the classes.
- --------------------------------------------------------------------------------
HOW THE FUND CALCULATES PERFORMANCE
FROM TIME TO TIME THE FUND MAY ADVERTISE ITS "TOTAL RETURN" (INCLUDING
"AVERAGE ANNUAL" TOTAL RETURN AND "AGGREGATE TOTAL RETURN") IN ADVERTISEMENTS
AND SALES LITERATURE. TOTAL RETURN IS CALCULATED SEPARATELY FOR CLASS A AND
CLASS B SHARES. These figures are based on historical earnings and are not
intended to indicate future performance. The "total return" shows how much an
investment in the Fund would have increased (decreased) over a specified period
of time (i.e., one, five or ten years or since inception of the Fund) assuming
that all distributions and dividends by the Fund were reinvested on the
reinvestment dates during the period and less all recurring fees. The
"aggregate" total return reflects actual performance over a stated period of
time. "Average annual" total return is a hypothetical rate of return that, if
achieved annually, would have produced the same aggregate total return if
performance had been constant over the entire period. "Average annual" total
return smooths out variations in performance and takes into account any
applicable initial or contingent deferred sales charges. Neither "average
annual" total return nor "aggregate" total return takes into account any federal
or state income taxes which may be payable upon redemption. The Fund may also
from time to time advertise its 30-day yield. See "Performance Information" in
the Statement of Additional Information. The "yield" refers to the income
generated by an investment in the Fund over a one-month or 30-day period. This
income is then "annualized," that is, the amount of income generated by the
investment during that 30-day period is assumed to be generated each 30-day
period for twelve periods and is shown as a percentage of the investment. The
income earned on the investment is also assumed to be reinvested at the end of
the sixth 30-day period. The Fund also may include comparative performance
information in advertising or marketing the Fund's shares. Such performance
information may include data from Lipper Analytical Services, Inc., Morningstar
Publications, Inc., other industry publications, business periodicals, and
market indices. See "Performance Information" in the Statement of Additional
Information. The Fund will include performance data for both Class A and Class B
shares of the Fund in any advertisement or information including performance
data of the Fund. Further performance information is contained in the Fund's
annual and semi-annual reports to shareholders, which may be obtained without
charge. See "Shareholder Guide--Shareholder Services--Reports to Shareholders."
26
<PAGE> 27
- --------------------------------------------------------------------------------
TAXES, DIVIDENDS AND DISTRIBUTIONS
TAXATION OF THE FUND
THE FUND HAS ELECTED TO QUALIFY AND INTENDS TO REMAIN QUALIFIED AS A
REGULATED INVESTMENT COMPANY UNDER THE INTERNAL REVENUE CODE OF 1986, AS
AMENDED. ACCORDINGLY, THE FUND WILL NOT BE SUBJECT TO FEDERAL INCOME TAXES ON
ITS NET INVESTMENT INCOME AND CAPITAL GAINS, IF ANY, THAT IT DISTRIBUTES TO ITS
SHAREHOLDERS.
TAXATION OF SHAREHOLDERS
All dividends out of net investment income, together with distributions of
short-term capital gains, will be taxable as ordinary income to the shareholder
whether or not reinvested. Any net long-term capital gains distributed to
shareholders will be taxable as such to the shareholders, whether or not
reinvested and regardless of the length of time a shareholder has owned his or
her shares.
The Fund has obtained an opinion of counsel to the effect that the
conversion of Class B shares into Class A shares does not constitute a taxable
event for U.S. income tax purposes. However, such opinion is not binding on the
Internal Revenue Service.
WITHHOLDING TAXES
Under the Internal Revenue Code, the Fund is required to withhold and remit
to the U.S. Treasury 31% of dividends, capital gain income and redemption
proceeds payable to individuals and certain noncorporation shareholders who fail
to furnish correct tax identification numbers on IRS Form W-9 (or IRS Form W-8
in the case of certain foreign shareholders).
DIVIDENDS AND DISTRIBUTIONS
THE FUND EXPECTS TO DECLARE DAILY AND PAY MONTHLY DIVIDENDS OF NET
INVESTMENT INCOME AND MAKE DISTRIBUTIONS AT LEAST ANNUALLY OF ANY NET CAPITAL
GAINS. THE PER SHARE DIVIDENDS ON CLASS B SHARES WOULD GENERALLY BE LOWER THAN
THE PER SHARE DIVIDENDS ON CLASS A SHARES, IF DISTRIBUTION FEES FOR BOTH CLASSES
WERE BEING ASSESSED, AS A RESULT OF THE HIGHER DISTRIBUTION FEE APPLICABLE WITH
RESPECT TO CLASS B SHARES. DISTRIBUTIONS OF CAPITAL GAINS WILL BE IN THE SAME
AMOUNT FOR CLASS A AND CLASS B SHARES. SEE "HOW THE FUND VALUES ITS SHARES."
DIVIDENDS AND DISTRIBUTIONS WILL BE PAID IN ADDITIONAL FUND SHARES, UNLESS
THE SHAREHOLDER ELECTS IN WRITING NOT LESS THAN FIVE BUSINESS DAYS PRIOR TO THE
RECORD DATE TO RECEIVE SUCH DIVIDENDS AND DISTRIBUTIONS IN CASH. Such election
should be submitted to Prudential Mutual Fund Services, Inc., Attention: Account
Maintenance, P.O. Box 15015, New Brunswick, New Jersey 08906-5015. The Fund will
notify each shareholder after the close of the Fund's taxable year of both the
dollar amount and the taxable status of that year's dividends and distributions
on a per share basis. If you hold shares through Prudential Securities, you
should contact your financial adviser to elect to receive dividends and
distributions in cash. Shareholders are urged to consult their own tax advisers
regarding specific questions as to federal, state or local taxes. See "Taxes" in
the Statement of Additional Information.
27
<PAGE> 28
- --------------------------------------------------------------------------------
GENERAL INFORMATION
DESCRIPTION OF COMMON STOCK
THE FUND WAS INCORPORATED IN MARYLAND ON DECEMBER 23, 1991. THE FUND IS
AUTHORIZED TO ISSUE 2 BILLION SHARES OF COMMON STOCK, $.001 PAR VALUE PER SHARE,
DIVIDED INTO TWO CLASSES, DESIGNATED CLASS A AND CLASS B COMMON STOCK, EACH OF
WHICH CONSISTS OF 1 BILLION AUTHORIZED SHARES. Both Class A and Class B common
stock represent an interest in the same assets of the Fund and are identical in
all respects except that each class bears certain distribution expenses and has
exclusive voting rights with respect to its distribution fee. See "How the Fund
is Managed-- Distributor." The Fund has received an order of the SEC permitting
the issuance and sale of multiple classes of common stock. Currently, the Fund
is offering only two classes, designated as Class A and Class B shares. In
accordance with the Fund's Articles of Incorporation, the Board of Directors may
authorize the creation of additional series of common stock and classes within
such series, with such preferences, privileges, limitations and voting and
dividend rights as the Board may determine.
The Board of Directors may increase or decrease the number of authorized
shares without the approval of shareholders. Shares of the Fund, when issued,
are fully paid, nonassessable, fully transferable and redeemable at the option
of the holder. Shares are also redeemable at the option of the Fund under
certain circumstances as described under "Shareholder Guide--How to Sell Your
Shares." Each share of Class A and Class B common stock is equal as to earnings,
assets and voting privileges, except as noted above, and each class bears the
expenses related to the distribution of its shares. There are no conversion,
preemptive or other subscription rights, except with respect to the conversion
of Class B shares into Class A shares described above. In the event of
liquidation, each share of common stock of the Fund is entitled to its portion
of all of the Fund's assets after all debt and expenses of the Fund have been
paid. Since Class B shares bear higher distribution expenses, the liquidation
proceeds to Class B shareholders are likely to be lower than to Class A
shareholders. The Fund's shares do not have cumulative voting rights for the
election of directors.
THE FUND DOES NOT INTEND TO HOLD ANNUAL MEETINGS OF SHAREHOLDERS UNLESS
OTHERWISE REQUIRED BY LAW. THE FUND WILL NOT BE REQUIRED TO HOLD MEETINGS OF
SHAREHOLDERS UNLESS THE ELECTION OF DIRECTORS IS REQUIRED TO BE ACTED ON BY
SHAREHOLDERS UNDER THE INVESTMENT COMPANY ACT. SHAREHOLDERS HAVE CERTAIN RIGHTS,
INCLUDING THE RIGHT TO CALL A MEETING UPON A VOTE OF 10% OF THE FUND'S
OUTSTANDING SHARES FOR THE PURPOSE OF VOTING ON THE REMOVAL OF ONE OR MORE
DIRECTORS OR TO TRANSACT ANY OTHER BUSINESS.
ADDITIONAL INFORMATION
This Prospectus, including the Statement of Additional Information which
has been incorporated by reference herein, does not contain all the information
set forth in the Registration Statement filed by the Fund with the SEC under the
Securities Act of 1933. Copies of the Registration Statement may be obtained at
a reasonable charge from the SEC or may be examined, without charge, at the
office of the SEC in Washington, D.C.
28
<PAGE> 29
- --------------------------------------------------------------------------------
SHAREHOLDERS' GUIDE
HOW TO BUY SHARES OF THE FUND
AS OF CLOSE OF BUSINESS ON MAY 18, 1995, THE FUND NO LONGER ACCEPTS
PURCHASE ORDERS FOR SHARES OF EITHER CLASS, EXCEPT FOR PURCHASES BY CERTAIN
RETIREMENT AND EMPLOYEE PLANS (EXCLUDING IRA ACCOUNTS). SEE "FUND
HIGHLIGHTS--IMPORTANT FUND INFORMATION."
YOU MAY PURCHASE SHARES OF THE FUND THROUGH PRUDENTIAL SECURITIES, PRUSEC
OR DIRECTLY FROM THE FUND THROUGH ITS TRANSFER AGENT, PRUDENTIAL MUTUAL FUND
SERVICES, INC. (PMFS OR THE TRANSFER AGENT). The minimum initial investment is
$5,000. The minimum subsequent investment is $1,000. All minimum investment
requirements are waived for certain retirement and employee savings plans or
custodial accounts for the benefit of minors. For purchases of Class B shares
made through the Automatic Savings Accumulation Plan, the minimum initial and
subsequent investment is $50. The minimum initial investment requirement is
waived for purchases of Class A shares effected through an exchange of Class B
shares of The BlackRock Government Income Trust.
THE PURCHASE PRICE IS THE NAV NEXT DETERMINED FOLLOWING RECEIPT OF AN ORDER
BY THE TRANSFER AGENT OR PRUDENTIAL SECURITIES PLUS A SALES CHARGE WHICH, AT
YOUR OPTION, MAY BE IMPOSED AT THE TIME OF PURCHASE OR ON A DEFERRED BASIS, AS
DESCRIBED BELOW.
Application forms can be obtained from PMFS, Prudential Securities or
Prusec. If a stock certificate is desired, it must be requested in writing for
each transaction. Certificates are issued only for full shares. Shareholders who
hold their shares through Prudential Securities will not receive stock
certificates.
The Fund reserves the right to reject any purchase order (including an
exchange into the Fund) or to suspend or modify the continuous offering of its
shares. See "How to Sell Your Shares" below.
Your dealer is responsible for forwarding payment promptly to the Fund. The
Distributor reserves the right to cancel any purchase order for which payment
has not been received by the fifth business day following the investment.
Transactions in shares of the Fund may be subject to postage and handling
charges imposed by your dealer.
PURCHASE BY WIRE. For an initial purchase of shares of the Fund by wire,
you must first telephone PMFS to receive an account number at (800) 225-1852
(toll-free). The following information will be requested: your address, tax
identification number, class election, dividend distribution election, amount
being wired and wiring bank. Instructions should then be given by you to your
bank to transfer funds by wire to State Street Bank and Trust Company, Boston,
Massachusetts, Custody and Shareholder Services Division, Attention: Prudential
Adjustable Rate Securities Fund, Inc., specifying on the wire the account number
assigned by PMFS and your name and identifying the sales charge alternative
(Class A or Class B shares).
29
<PAGE> 30
If you arrange for receipt by State Street of Federal Funds prior to the
calculation of NAV (4:15 P.M., New York time), on a business day, you may
purchase shares of the Fund as of that day. See "Net Asset Value" in the
Statement of Additional Information.
In making a subsequent purchase order by wire, you should wire State Street
directly and should be sure that the wire specifies Prudential Adjustable Rate
Securities Fund, Inc., Class A or Class B shares and your name and individual
account number. It is not necessary to call PMFS to make subsequent purchase
orders utilizing Federal Funds. The minimum amount which may be invested by wire
is $1,000.
ALTERNATIVE PURCHASE PLAN
THE FUND OFFERS TWO CLASSES OF SHARES WHICH ALLOWS YOU TO CHOOSE THE MOST
BENEFICIAL SALES CHARGE STRUCTURE FOR YOUR INDIVIDUAL CIRCUMSTANCES GIVEN THE
AMOUNT OF THE PURCHASE, THE LENGTH OF TIME YOU EXPECT TO HOLD THE SHARES AND
OTHER RELEVANT CIRCUMSTANCES. You may purchase shares at the next determined NAV
plus a sales charge which, at your election, may be imposed either at the time
of purchase (the Class A shares or the initial sales charge alternative) or on a
deferred basis (the Class B shares or the deferred sales charge alternative)
(the Alternative Purchase Plan).
CLASS A SHARES ARE SUBJECT TO AN INITIAL SALES CHARGE OF UP TO 1.00% OF THE
OFFERING PRICE AND AN ANNUAL DISTRIBUTION AND SERVICE FEE WHICH MAY BE CHARGED
AT A RATE OF UP TO .50 TO 1% OF THE AVERAGE DAILY NET ASSETS OF THE CLASS A
SHARES. Certain purchases of Class A shares may qualify for reduction or waiver
of initial sales charges. The Distributor is currently waiving all payments to
it under the Class A Plan. Therefore, the Fund is currently not assessing any
12b-1 fees on the Class A shares. See "How the Fund is Managed--Distributor."
See also "Initial Sales Charge Alternative--Class A Shares--Reduction or Waiver
of Initial Sales Charges" below.
CLASS B SHARES DO NOT INCUR A SALES CHARGE WHEN THEY ARE PURCHASED BUT ARE
SUBJECT TO A CONTINGENT DEFERRED SALES CHARGE FOR ONE YEAR FROM THE DATE OF
PURCHASE OF THE LESSER OF THE AMOUNT INVESTED OR THE REDEMPTION PROCEEDS AND AN
ANNUAL DISTRIBUTION FEE (INCLUDING AN ASSET-BASED SALES CHARGE OF UP TO .75 OF
1% AND A SERVICE FEE OF UP TO .25 OF 1% OF THE AVERAGE DAILY NET ASSETS OF THE
CLASS B SHARES) OF UP TO 1% OF THE AVERAGE DAILY NET ASSET VALUE OF THE CLASS B
SHARES. CLASS B SHARES WILL CONVERT AUTOMATICALLY TO CLASS A SHARES AFTER THE
ONE-YEAR CDSC PERIOD HAS EXPIRED. THE FUND IS CURRENTLY NOT ASSESSING ANY 12b-1
FEES ON THE CLASS B SHARES AS THE DISTRIBUTOR NO LONGER HAS ANY COSTS
REIMBURSABLE TO IT UNDER THE CLASS B PLAN. SEE "HOW THE FUND IS
MANAGED--DISTRIBUTOR."
The two classes of shares represent an interest in the same portfolio of
investments of the Fund and have the same rights, except that each class bears
the separate expenses of its Rule 12b-1 distribution plan and has exclusive
voting rights with respect to such a plan. The net income attributable to each
class and the dividends payable on the shares of each class will be reduced by
the amount of the distribution and service fees of each class. Class B shares
generally bear the expenses of higher distribution and service fees, when
distribution fees are being fully assessed, which will cause the Class B shares
to typically have a higher expense ratio and to pay lower dividends than the
Class A shares. Currently, the Fund is not assessing any fees under the Class A
30
<PAGE> 31
or Class B Plan and, the Class A and Class B shares, in such circumstances, will
have the same expense ratio and to pay the same dividends.
Financial advisers will receive different compensation for selling Class A
and Class B shares.
The following illustrations are provided to assist you in determining which
method of purchase best suits your individual circumstances:
If you qualify for a reduced sales charge, you might elect the initial
sales charge alternative because a similar sales charge reduction is not
available for purchases under the deferred sales charge alternative and because
Class A shares are typically subject to lower distribution and service fees than
are Class B shares. However, because the initial sales charge is deducted at the
time of purchase, you would not have all of your funds invested initially.
If you do not qualify for a reduced initial sales charge and expect to
maintain your investment in the Fund for less than one year you might also elect
the initial sales charge alternative because Class A shares are not subject to a
deferred sales charge upon redemption and because Class A shares are typically
subject to lower distribution and service fees than are Class B shares. Again,
however, you must weigh this consideration against the fact that not all of your
funds will be invested initially.
On the other hand, you might determine that it is more advantageous to have
all of your funds invested initially, although you may be subject, for a one
year period, to a contingent deferred sales charge of 1% and a distribution and
service fee. If you are not entitled to a reduced initial sales charge and you
expect to maintain your investment in the Fund for more than one year, you
should consider purchasing Class B shares since Class B shares will be converted
automatically into Class A shares after the one year contingent deferred sales
charge period has expired. You will thereafter become a Class A shareholder and,
as such, will be subject to the distribution and service fees (which is
typically lower for Class A shares) applicable to Class A shareholders.
INITIAL SALES CHARGE ALTERNATIVE--CLASS A SHARES
The offering price of Class A shares is the NAV next determined plus a
sales charge (expressed as a percentage of the offering price and of the amount
invested) as shown in the following table:
<TABLE>
<CAPTION>
SALES CHARGE AS SALES CHARGE AS DEALER CONCESSION AS
PERCENTAGE OF PERCENTAGE OF PERCENTAGE OF
AMOUNT OF PURCHASE OFFERING PRICE AMOUNT INVESTED OFFERING PRICE
- -------------------------- --------------- ----------------- --------------------
<S> <C> <C> <C>
Less than $100,000 1.00% 1.00% 1.00%
$100,000 and above 0% 0% 0%
</TABLE>
Selling dealers may be deemed to be underwriters, as that term is defined
under federal securities laws.
REDUCTION AND WAIVER OF INITIAL SALES CHARGES. Sales charges are reduced
under Rights of Accumulation and Letters of Intent. Class A shares are offered
at NAV to participants in certain retirement and deferred compensation plans
including qualified or non-qualified plans under the Internal Revenue Code and
certain affinity group and group savings plans, provided that the plan has
existing assets of at least $10 million or 2,500 eligible employees or members.
Additional
31
<PAGE> 32
information concerning the reduction and waiver of initial sales charges is set
forth in the Statement of Additional Information. In the case of pension,
profit-sharing or stock bonus plans under Section 401 of the Internal Revenue
Code and deferred compensation and annuity plans under Sections 457 and
403(b)(7) of the Internal Revenue Code (Benefit Plans) whose accounts are held
directly with the Transfer Agent and for which the Transfer Agent does
individual account record keeping (Direct Account Benefit Plans) and Benefit
Plans sponsored by PSI or its subsidiaries (PSI or Subsidiary Prototype Benefit
Plans), Class A shares are offered at NAV to participants who are repaying loans
made from such plans to the participant.
Class A shares may be purchased at net asset value, with a waiver of the
initial sales charge, by or on behalf of participants in the Prudential
Retirement Accumulation Program 401(K) Plan for which Prudential Mutual Fund
Services, Inc., the Fund's transfer agent, provides recordkeeping services,
provided that (i) for existing plans, the plan has existing assets of $1 million
or more, as measured on the last business day of the month, invested in shares
of Prudential Mutual Funds (excluding money market funds other than those
acquired pursuant to the exchange privilege) held at the transfer agent and (ii)
for new plans, the plan initially invests $1 million or more in shares of
non-money market Prudential Mutual Funds or has at least 1,000 eligible
employees or participants.
Class A shares are offered at NAV to Directors and officers of the Fund and
other Prudential Mutual Funds, to employees of Prudential Securities and PMF and
their subsidiaries and to members of the families of such persons who maintain
an "employee related" account at Prudential Securities or the Transfer Agent.
Class A shares are offered at NAV to employees and special agents of The
Prudential Insurance Company of America and its subsidiaries and to all persons
who have retired directly from active service with Prudential or one of its
subsidiaries.
Class A shares are offered at NAV to an investor who has a business
relationship with a financial adviser who joined Prudential Securities from
another investment firm, provided that (i) the purchase is made within 90 days
of the commencement of the financial adviser's employment at Prudential
Securities, (ii) the purchase is made with proceeds of a redemption of shares of
any open-end investment company sponsored by the financial adviser's previous
employer (other than a money market fund or other no-load fund which imposes a
distribution or service fee of .25 of 1% or less) on which no deferred sales
load, fee or other charge was imposed on redemption and (iii) the financial
adviser served as the client's broker on the previous purchase.
You must notify the Transfer Agent either directly or through Prudential
Securities or Prusec that you are entitled to the reduction or waiver of the
sales charge. The reduction or waiver will be granted subject to confirmation of
your entitlement. No initial sales charges are imposed upon Class A shares
purchased upon the reinvestment of dividends and distributions. See "Purchase
and Redemption of Fund Shares--Reduction and Waiver of Initial Sales
Charges--Class A Shares" in the Statement of Additional Information.
OTHER WAIVERS. Class A shares may be purchased at NAV, through Prudential
Securities or the Transfer Agent, by investors who have a business relationship
with a financial adviser who joined Prudential Securities from another
investment firm, provided that (i) the purchase is made within 90 days of the
commencement of the financial adviser's employment at Prudential Securities,
32
<PAGE> 33
(ii) the purchase is made with proceeds of a redemption of shares of any
open-end, non-money market fund sponsored by the financial adviser's previous
employer (other than a fund which imposes a distribution or service fee .25 of
1% or less) and (iii) the financial adviser served as the client's broker on the
previous purchase.
DEFERRED SALES CHARGE ALTERNATIVE--CLASS B SHARES
The offering price of Class B shares for investors choosing the deferred
sales charge alternative is the NAV next determined following receipt of an
order by the Transfer Agent or Prudential Securities. There is no sales charge
imposed at the time of purchase; however redemption of Class B shares may be
subject to a contingent deferred sales charge. An account servicing fee is also
paid by the Fund to financial advisers and sales representatives whose customers
hold shares of the Fund. See "How to Sell Your Shares--Contingent Deferred Sales
Charge--Class B Shares."
HOW TO SELL YOUR SHARES
YOU CAN REDEEM YOUR SHARES OF THE FUND AT ANY TIME AT THE NAV NEXT
DETERMINED AFTER THE REDEMPTION REQUEST IS RECEIVED IN PROPER FORM BY THE
TRANSFER AGENT OR PRUDENTIAL SECURITIES. SEE "HOW THE FUND VALUES ITS SHARES."
In certain cases, however, redemption proceeds from the Class B shares will be
reduced by the amount of any applicable contingent deferred sales charge, as
described below. See "Contingent Deferred Sales Charge--Class B Shares."
IF YOU HOLD SHARES OF THE FUND THROUGH PRUDENTIAL SECURITIES, YOU MUST
REDEEM YOUR SHARES BY CONTACTING YOUR PRUDENTIAL SECURITIES FINANCIAL ADVISER.
IF YOU HOLD SHARES IN NON-CERTIFICATE FORM, A WRITTEN REQUEST FOR REDEMPTION
SIGNED BY YOU EXACTLY AS THE ACCOUNT IS REGISTERED IS REQUIRED. IF YOU HOLD
CERTIFICATES, THE CERTIFICATES, SIGNED IN THE NAME(S) SHOWN ON THE FACE OF THE
CERTIFICATES, MUST BE RECEIVED BY THE TRANSFER AGENT IN ORDER FOR THE REDEMPTION
REQUEST TO BE PROCESSED. IF REDEMPTION IS REQUESTED BY A CORPORATION,
PARTNERSHIP, TRUST OR FIDUCIARY, WRITTEN EVIDENCE OF AUTHORITY ACCEPTABLE TO THE
TRANSFER AGENT MUST BE SUBMITTED BEFORE SUCH REQUEST WILL BE ACCEPTED. All
correspondence and documents concerning redemptions should be sent to the Fund
in care of its Transfer Agent, Prudential Mutual Fund Services, Inc., Attention:
Redemption Services, P.O. Box 15010, New Brunswick, New Jersey 08906-5010.
If the proceeds of the redemption (a) exceed $50,000, (b) are to be paid to
a person other than the record owner, (c) are to be sent to an address other
than the address on the Transfer Agent's records, or (d) are to be paid to a
corporation, partnership, trust or fiduciary, the signature(s) on the redemption
request and on the certificates, if any, or stock power must be guaranteed by an
"eligible guarantor institution." An "eligible guarantor institution" includes
any bank, broker, dealer or credit union. The Transfer Agent reserves the right
to request additional information from, and make reasonable inquiries of, any
eligible guarantor institution. For clients of Prusec, a signature guarantee may
be obtained from the agency or office manager of most Prudential Insurance and
Financial Services or Prudential Preferred Financial Services offices.
PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE MADE BY CHECK WITHIN
SEVEN DAYS AFTER RECEIPT BY THE TRANSFER AGENT OF THE CERTIFICATE AND/OR WRITTEN
REQUEST EXCEPT AS INDICATED BELOW. IF YOU HOLD SHARES THROUGH PRUDENTIAL
SECURITIES, PAYMENT FOR SHARES PRESENTED FOR REDEMPTION
33
<PAGE> 34
WILL BE CREDITED TO YOUR PRUDENTIAL SECURITIES ACCOUNT, UNLESS YOU INDICATE
OTHERWISE. Such payment may be postponed or the right of redemption suspended at
times (a) when the New York Stock Exchange is closed for other than customary
weekends and holidays, (b) when trading on such Exchange is restricted, (c) when
an emergency exists as a result of which disposal by the Fund of securities
owned by it is not reasonably practicable or it is not reasonably practicable
for the Fund fairly to determine the value of its net assets, or (d) during any
other period when the Securities and Exchange Commission, by order, so permits;
provided that applicable rules and regulations of the SEC shall govern as to
whether the conditions prescribed in (b), (c) or (d) exist.
PAYMENT FOR REDEMPTION OF RECENTLY PURCHASED SHARES WILL BE DELAYED UNTIL
THE FUND OR THE 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 CHECKS.
REDEMPTION IN KIND. If the Board of Directors determines that it would be
detrimental to the best interests of the remaining shareholders of the Fund to
make payment wholly or partly in cash, the Fund may pay the redemption price in
whole or in part by a distribution in kind of securities from the investment
portfolio of the Fund, in lieu of cash, in conformity with applicable rules of
the SEC. Securities will be readily marketable and will be valued in the same
manner as in a regular redemption. See "How the Fund Values Its Shares." If your
shares are redeemed in kind, you would incur transaction costs in converting the
assets into cash. The Fund, however, has elected to be governed by Rule 18f-1
under the Investment Company Act, under which the Fund is obligated to redeem
shares solely in cash up to the lesser of $250,000 or 1% of the net asset value
of the Fund during any 90-day period for any one shareholder.
INVOLUNTARY REDEMPTION. In order to reduce expenses of the Fund, the Board
of Directors may redeem all of the shares of any shareholder, other than a
shareholder which is an IRA or other tax-deferred retirement plan, whose account
has a net asset value of less than $500 due to a redemption. The Fund will give
such shareholders 60 days' prior written notice in which to purchase sufficient
additional shares to avoid such redemption.
90-DAY REPURCHASE PRIVILEGE. If you redeem your shares and have not
previously exercised the repurchase privilege, you may reinvest any portion or
all of the proceeds of such redemption in shares of the Fund at the NAV next
determined after the order is received, which must be within 90 days after the
date of the redemption. No sales charge will apply to such repurchases. You will
receive pro rata credit for any contingent deferred sales charge paid in
connection with the redemption of Class B shares. You must notify the Fund'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 the contingent deferred sales charge previously paid. Exercise of the
repurchase privilege will generally not affect federal income tax treatment of
any gain realized upon 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.
34
<PAGE> 35
CONTINGENT DEFERRED SALES CHARGE--CLASS B SHARES
If you have elected to purchase shares without an initial sales charge
(Class B), a contingent deferred sales charge or CDSC of 1% will be imposed on
all redemptions made within one year of purchase. The CDSC will be deducted from
the redemption proceeds and reduce the amount paid to you. A CDSC will be
applied on the lesser of the original purchase price or the current value of the
shares being redeemed. Increases in the value of your shares purchased through
reinvestment of dividends or distributions are not subject to a CDSC. The amount
of any CDSC is currently being paid to the Fund. In the event the Distributor
incurs additional costs reimbursable to it under the Class B Plan, the CDSC will
be paid to and retained by the Distributor. See "How the Fund is
Managed--Distributor."
In determining the contingent deferred sales charge applicable to a
redemption, it will be assumed that the redemption is made first of shares
acquired pursuant to reinvestment of dividends and distributions and then of
shares held for the longest period of time within the one-year period. For
purposes of calculating the one-year period, all payments for the purchase of
shares during a month will be aggregated and deemed to have been made on the
last day of the month. No contingent deferred sales charge will be applicable
after the one-year period.
For example, assume you purchased 1,000 shares at $2 per share for a cost
of $2,000. Subsequently, you acquired 50 additional shares through dividend
reinvestment. Six months after the purchase, you decided to redeem 200 shares.
Assuming at the time of redemption, the net asset value had appreciated to $2.20
per share, the proceeds of the redemption would be $440. Fifty shares would not
be subject to charge because of dividend reinvestment. With respect to the
remaining 150 shares, the charge would be applied to the original cost of $2 per
share and not to the increase in net asset value per share of $.20. Therefore,
$300 of the $440 redemption proceeds would be charged at a rate of 1%.
For federal income tax purposes, the amount of the contingent deferred
sales charge will reduce the gain or increase the loss, as the case may be, on
the amount recognized on the redemption of shares.
HOW TO EXCHANGE YOUR SHARES
CLASS A SHAREHOLDERS OF THE FUND HAVE AN EXCHANGE PRIVILEGE WITH THE CLASS
A SHARES OF PRUDENTIAL SHORT-TERM GLOBAL INCOME FUND--GLOBAL ASSETS PORTFOLIO,
SUBJECT TO THE MINIMUM INVESTMENT REQUIREMENTS OF THAT FUND. CLASS A
SHAREHOLDERS OF THE FUND MAY EXCHANGE THEIR SHARES FOR CLASS A SHARES OF
PRUDENTIAL SHORT-TERM GLOBAL INCOME FUND--GLOBAL ASSETS PORTFOLIO ON THE BASIS
OF THE RELATIVE NAV. No sales charge will be imposed at the time of the
exchange. Any applicable CDSC payable upon the redemption of shares exchanged
will be calculated from the first day of the month after the initial purchase.
See "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 addition, Class A and Class B shareholders of the Fund may exchange
their shares for Class A shares of certain other Prudential Mutual Funds, or for
shares of one or more specified money market funds, on the basis of the relative
net asset value and subject to the minimum investment requirements of that fund.
See "Shareholder Investment Account--Exchange Privilege" in the Statement of
Additional Information. An exchange will be treated as a redemption and
35
<PAGE> 36
purchase for tax purposes. Class A shares and shares of money market funds that
are acquired as a result of an exchange of Class B shares of the Fund, as
described above, will continue to be subject to any contingent deferred sales
charge previously applicable to the Class B shares subject to the exchange. See
"Exchange Privilege" in the Statement of Additional Information. Except for
exchanges into the Global Assets Portfolio of the Prudential Short-Term Global
Income Fund, once shares are exchanged out of the Fund pursuant to the Exchange
Privilege, they may not be re-exchanged for shares of the Fund.
IN ORDER TO EXCHANGE SHARES BY TELEPHONE, YOU MUST AUTHORIZE THE TELEPHONE
EXCHANGE PRIVILEGE ON YOUR INITIAL APPLICATION FORM OR BY WRITTEN NOTICE TO THE
TRANSFER AGENT AND HOLD SHARES IN NON-CERTIFICATE FORM. Thereafter, you may call
the Fund at (800) 225-1852 to execute a telephone exchange of shares, 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.
All exchanges will be made on the basis of the relative net asset value of the
two funds next determined after the request is received in good order. The
Exchange Privilege is available only in states where the exchange may legally be
made.
IF YOU HOLD SHARES THROUGH PRUDENTIAL SECURITIES YOU MAY EXCHANGE YOUR
SHARES BY CONTACTING YOUR PRUDENTIAL SECURITIES FINANCIAL ADVISER. IF YOU HOLD
CERTIFICATES, THE CERTIFICATE SIGNED IN THE NAME(S) SHOWN ON THE FACE OF THE
CERTIFICATE MUST BE RETURNED IN ORDER FOR THE SHARES TO BE EXCHANGED. SEE "HOW
TO SELL YOUR SHARES" ABOVE.
Neither the Fund nor its agents will be liable for any loss, liability or
cost which results from acting upon instructions reasonably believed to be
genuine under the foregoing procedures.
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 sixty
days' notice to shareholders.
SHAREHOLDER SERVICES
In addition to the exchange privilege, as a shareholder in the Fund, you
can take advantage of the following additional services and privileges:
- AUTOMATIC REINVESTMENT OF DIVIDENDS AND/OR DISTRIBUTIONS WITHOUT A SALES
CHARGE. For your convenience, all dividends and distributions are automatically
reinvested in full and fractional shares of the Fund at NAV without a sales
charge. You may direct the Transfer Agent in writing not less that 5 full
business days prior to the record date to have subsequent dividends and/or
36
<PAGE> 37
distributions sent in cash rather than reinvested. If you hold shares through
Prudential Securities, you should contact your financial adviser.
- AUTOMATIC SAVINGS ACCUMULATION PLAN (ASAP). Under ASAP you may make
regular purchases of the Fund's Class B shares in amounts as little as $50 via
an automatic debit to a bank account or Prudential Securities account (including
a Command Account). ASAP is not available for purchases of Class A shares. For
additional information about this service, you may contact your Prudential
Securities financial adviser, Prusec registered representative or the Transfer
Agent directly.
- TAX-DEFERRED RETIREMENT PLANS. Various tax-deferred retirement plans,
including a 401(k) plan, a self-directed individual retirement account 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 Class A shares of the Fund with a minimum value of
$10,000. Such withdrawal plan provides for monthly or quarterly checks. See
"Shareholder Investment Account--Systematic Withdrawal Plan" in the Statement of
Additional Information.
- REPORTS TO SHAREHOLDERS. The Fund will send you annual and semi-annual
reports. The financial statements appearing in annual reports are audited by
independent accountants. In order to reduce duplicate mailing and printing
expenses, the Fund will provide one annual and semi-annual shareholder report
and annual prospectus per household. You may request additional copies of such
reports by calling (800) 225-1852 (toll-free) or by writing to the Fund at One
Seaport Plaza, New York, New York 10292. In addition, monthly unaudited
financial data are available upon request from the Fund.
- SHAREHOLDER INQUIRIES. Inquiries should be addressed to the Fund at One
Seaport Plaza, New York, New York 10292, or by telephone, at (800) 225-1852
(toll-free) or, from outside the U.S.A. at (908) 417-7555 (collect).
For additional information regarding the services and privileges described
above, see "Shareholder Investment Account" in the Statement of Additional
Information.
37
<PAGE> 38
- --------------------------------------------------------------------------------
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 Fund at 1 (800) 225-1852 for a free prospectus. Read the prospectus
carefully before you invest or send money.
<TABLE>
<S> <C>
TAXABLE BOND FUNDS
EQUITY FUNDS
Prudential Adjustable Rate Securities Fund, Inc.
Prudential Diversified Bond Fund, Inc. Prudential Allocation Fund
Prudential GNMA Fund Conservatively Managed Portfolio
Prudential Government Income Fund, Inc. Strategy Portfolio
Prudential Government Securities Trust Prudential Equity Fund, Inc.
Intermediate Term Series Prudential Equity Income Fund
Prudential High Yield Fund, Inc. Prudential Growth Opportunity Fund, Inc.
Prudential Structured Maturity Fund, Inc. Prudential IncomeVertible(R) Fund, Inc.
Income Portfolio Prudential Multi-Sector Fund, Inc.
Prudential U.S. Government Fund Prudential Utility Fund
The BlackRock Government Income Trust Nicholas-Applegate Fund, Inc.
Nicholas-Applegate Growth Equity Fund
TAX-EXEMPT BOND FUNDS
MONEY MARKET FUNDS
Prudential California Municipal Fund
California Series - Taxable Money Market Funds
California Income Series Prudential Government Securities Trust
Prudential Municipal Bond Fund Money Market Series
High Yield Series U.S. Treasury Money Market Series
Insured Series Prudential Special Money Market Fund
Modified Term Series Money Market Series
Prudential Municipal Series Fund Prudential MoneyMart Assets
Arizona Series
Florida Series - Tax-Free Money Market Funds
Georgia Series Prudential Tax-Free Money Fund
Hawaii Income Series Prudential California Municipal Fund
Maryland Series California Money Market Series
Massachusetts Series Prudential Municipal Series Fund
Michigan Series Connecticut Money Market Series
Minnesota Series Massachusetts Money Market Series
New Jersey Series New Jersey Money Market Series
New York Series New York Money Market Series
North Carolina Series
Ohio Series - Command Funds
Pennsylvania Series Command Money Fund
Prudential National Municipals Fund, Inc. Command Government Fund
Command Tax-Free Fund
GLOBAL FUNDS
- Institutional Money Market Funds
Prudential Europe Growth Fund, Inc. Prudential Institutional Liquidity
Prudential Global Fund, Inc. Portfolio, Inc.
Prudential Global Genesis Fund, Inc. Institutional Money Market Series
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.
</TABLE>
A-1
<PAGE> 39
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
information or representations must
not be relied upon as having been PROSPECTUS
authorized by the Fund or the
Distributor. This Prospectus does
not constitute an offer by the Fund
or by the Distributor to sell or a
solicitation of 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.
PRUDENTIAL
- ------------------------------------- ADJUSTABLE RATE
TABLE OF CONTENTS SECURITIES FUND, INC.
JUNE , 1995
<TABLE>
<CAPTION>
PAGE
-------
<S> <C>
FUND HIGHLIGHTS....................... 2
Risk Factors and Special
Characteristics................... 3
FUND EXPENSES......................... 5
FINANCIAL HIGHLIGHTS.................. 6
HOW THE FUND INVESTS.................. 7
Investment Objective and Policies... 7
Other Investments and Investment
Techniques........................ 14
Investment Restrictions............. 20
HOW THE FUND IS MANAGED............... 21
Manager............................. 21
Fee Waivers and Subsidy............. 22
Distributor......................... 22
Portfolio Transactions.............. 25
Custodian and Transfer and Dividend
Disbursing Agent.................. 25
HOW THE FUND VALUES ITS SHARES........ 25
HOW THE FUND CALCULATES PERFORMANCE... 26
TAXES, DIVIDENDS AND DISTRIBUTIONS.... 27
Taxation of the Fund................ 27
Taxation of Shareholders............ 27
Withholding Taxes................... 27
Dividends and Distributions......... 27
GENERAL INFORMATION................... 28
Description of Common Stock......... 28
Additional Information.............. 28
SHAREHOLDERS' GUIDE................... 29
How to Buy Shares of the Fund....... 29
Alternative Purchase Plan........... 30
How to Sell Your Shares............. 33
How to Exchange Your Shares......... 35
Shareholder Services................ 36
THE PRUDENTIAL MUTUAL FUND
FAMILY.............................. A-1
</TABLE>
- ------------------------------------------------ [PRUDENTIAL MUTUAL
MF 156A 4445901 FUNDS LOGO]
CUSIP NOS.: Class A: 74429J106
Class B: 74429J205
