As filed with the Securities and Exchange Commission on January 29, 1999
Securities Act Registration No. 2-74139
Investment Company Act Registration No. 811-3264
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM N-1A
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933 [ ]
PRE-EFFECTIVE AMENDMENT NO. [ ]
POST-EFFECTIVE AMENDMENT NO. 28 [X]
AND/OR
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 [ ]
AMENDMENT NO. 29 [X]
(Check appropriate box or boxes)
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PRUDENTIAL GOVERNMENT SECURITIES TRUST
(Exact name of registrant as specified in charter)
(Formerly, Prudential-Bache Government Securities Trust)
GATEWAY CENTER THREE
NEWARK, NEW JERSEY 07102-4077
(Address of Principal Executive Offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (973) 367-7521
DEBORAH A. DOCS, ESQ.
GATEWAY CENTER THREE
100 MULBERRY STREET
NEWARK, NEW JERSEY 07102-4077
(Name and Address of Agent for Service)
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
As soon as practicable after the effective
date of the Registration Statement.
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IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE
(CHECK APPROPRIATE BOX):
[ ] immediately upon filing pursuant to paragraph (b)
[ ] on (date) pursuant to paragraph (b)
[X] 60 days after filing pursuant to paragraph (a)(1)
[ ] on March 31 pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of Rule 485
IF APPROPRIATE, CHECK THE FOLLOWING BOX:
[ ] this post-effective amendment designates a new effective
date for a previously filed post-effective amendment
Title of Securities Being Registered........Shares of Beneficial Interest (Par
Value $.01 per share)
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FUND TYPE:
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Money Market
INVESTMENT OBJECTIVE:
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High current income,
preservation of capital and
maintenance of liquidity
Prudential
Government
Securities Trust
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MONEY MARKET SERIES
PROSPECTUS DATED APRIL __, 1999
As with all mutual funds, the Securities and Exchange Commission has not
approved the Trust's shares, nor has the SEC determined that this prospectus is
complete or accurate. It is a criminal offense to state otherwise.
[LOGO] Prudential
Investments
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<PAGE>
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Table of Contents
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1 Risk/Return Summary
1 Investment Objective and Principal Strategies
1 Principal Risks
2 Evaluating Performance
3 Fees and Expenses
5 How the Series Invests
5 Investment Objectives and Policies
7 Additional Strategies
8 Investment Risks
11 How the Series is Managed
11 Manager
11 Investment Adviser
11 Distributor
12 Year 2000 Readiness Disclosure
13 Series Distributions and Tax Issues
13 Distributions
14 Tax Issues
15 How to Buy, Sell and Exchange Shares of the Series
15 How to Buy Shares
20 How to Sell Your Shares
22 How to Exchange Your Shares
25 Financial Highlights
25 Class A Shares
26 Class Z Shares
27 The Prudential Mutual Fund Family
For More Information (Back Cover)
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Money Market Series [GRAPHIC] (800) 225-1852
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Risk/Return Summary
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This section highlights key information about the Money Market Series, which we
refer to as "the Series." Additional information follows this summary.
INVESTMENT OBJECTIVES AND PRINCIPAL STRATEGIES
Our investment objectives are high current income, preservation of capital and
maintenance of liquidity. To achieve our objectives, we invest primarily in a
diversified portfolio of short-term money market instruments issued or
guaranteed by the United States Government or its agencies or instrumentalities.
While we make every effort to achieve our investment objective and maintain a
net asset value of $1 per share, we can't guarantee success. To date, the
Series' net asset value has never deviated from $1 per share.
PRINCIPAL RISKS
Although we try to invest wisely, all investments involve risk. The money market
securities in which the Series invests are generally subject to the risk that
the obligations may lose value because interest rates change. In addition,
certain securities may be subject to the risk that the issuer may be unable to
make principal and interest payments when they are due. Certain other securities
may be subject to prepayment risk, which means that if they are prepaid, the
Series may have to replace them with lower yielding securities. Although
investments in mutual funds involve risk, investing in money market portfolios
like the Series is generally less risky than investing in other types of funds.
This is because the Series invests only in high-quality securities, limits the
average maturity of the portfolio to 90 days or less, and limits the maturity of
any security to no more than thirteen months. For more detailed information
about the risks associated with the Series, see "Investment Risks."
An investment in the Series is not a bank deposit and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency. Although the Series seeks to preserve the value of your investment at $1
per share, it is possible to lose money by investing in the Series.
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1
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Risk/Return Summary
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EVALUATING PERFORMANCE
A number of factors--including risk--affect how the Series performs. The
following bar chart and table show the Series' performance for each full
calendar year of operation for the last 10 years. They demonstrate the risk of
investing in the Series and how returns can change. Past performance does not
mean that the Series will achieve similar results in the future. For current
yield information, you can call us at (800) 225-1852 (toll free).
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Annual Returns (Class A Shares)(1)
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1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
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[Bar Chart Here}
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BEST QUARTER: ?% (?nd quarter of 199?) WORST QUARTER: ?% (?rd quarter of 199?)
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(1) The Series' year-to-date return as of [ ] was __%.
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Average Annual Returns (as of 12-31-98)(1)
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1 YR 5 YRS 10 YRS SINCE INCEPTION
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Class A shares __% __% __% __% (since 1-12-82)
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Class Z shares __% n/a n/a __% (since 3-1-96)
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Lipper Average(2) __% __% __% *
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7-Day Yield (as of December 31, 1998)(1) __%
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(1) The Series' returns and yield are after deduction of expenses.
(2) The Lipper Average is based on the average return of all mutual funds in
the Lipper U.S. Taxable Money Market Funds category and does not include
the effect of any sales charges. These returns would be lower if they
included the effect of sales charges.
(*) Lipper return since inception of each class are __% for Class A and __% for
Class Z shares. Source: Lipper, Inc.
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2 Money Market Series [GRAPHIC] (800) 225-1852
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Risk/Return Summary
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FEES AND EXPENSES
This table shows the fees and expenses for each share class of the Series --
Class A and Z. Class Z shares are available only to a limited group of
investors. For more information about which share class may be right for you,
see "How to Buy, Sell and Exchange Shares of the Series."
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Shareholder Fees(1) (paid directly from your investment)
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CLASS A CLASS Z
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Maximum sales charge (load) imposed on
purchases (as a percentage of offering price) None None
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Maximum deferred sales charge (load)
(as a percentage of the lower of original
purchase price or sale proceeds) None None
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Maximum sales charge (load) imposed
on reinvested dividends and other distributions None None
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Redemption fees None None
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Exchange fee None None
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Annual Series Operating Expenses (deducted from Series assets)
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CLASS A CLASS Z
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Management fees 0.400% 0.400%
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+ Distribution (12b-1) and service fees 0.125% None
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+ Other expenses 0.245% 0.240%
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= Total annual Series operating expenses 0.770% 0.640%
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(1) Your broker may charge you a separate and additional fee for purchases and
sales of shares.
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3
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Risk/Return Summary
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Example
This example will help you compare the fees and expenses of the Series' two
share classes and compare the cost of investing in the Series with the cost of
investing in other mutual funds.
The example assumes that you invest $10,000 in the Series for the time
periods indicated and then sell all of your shares at the end of those periods.
The example also assumes that your investment has a 5% return each year and that
the Series' operating expenses remain the same. Although your actual costs may
be higher or lower, based on these assumptions your costs would be:
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1 YR 3 YRS 5 YRS 10 YRS
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Class A shares $__ $__ $__ $__
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Class Z shares $__ $__ $__ $__
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4 Money Market Series [GRAPHIC] (800) 225-1852
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How the Series Invests
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INVESTMENT OBJECTIVES AND POLICIES
The Series' investment objectives are high current income, the preservation of
capital and maintenance of liquidity. While we make every effort to achieve our
objectives, we can't guarantee success.
The Series invests in short-term money market instruments issued or
guaranteed by the United States Government or its agencies or instrumentalities
to try to provide investors with high current income while maintaining a stable
net asset value of $1 per share. We manage the Series to comply with specific
rules designed for money market mutual funds. The Series will invest at least
80% of its total assets in United States Government securities. These securities
may include securities issued or guaranteed by the United States Treasury, by
various agencies of the United States Government or by various instrumentalities
which have been established or sponsored by the United States Government,
including repurchase agreements with respect to such securities. Some of these
debt securities are backed by the full faith and credit of the U.S. Government,
like obligations of the Government National Mortgage Association (GNMA or
"Ginnie Mae"). Debt securities issued by other government entities, like
obligations of the Federal National Mortgage Association (FNMA or "Fannie Mae")
and the Student Loan Marketing Association (SLMA or "Sallie Mae"), are not
backed by the full faith and credit of the U.S. Government. However, these
issuers have the right to borrow from the U.S. Treasury to meet their
obligations. In contrast, the debt securities of other issuers, like the Farm
Credit System, depend entirely upon their own resources to repay their debt.
The U.S. Treasury sometimes "strips" Treasury debt obligations into their
component parts: the Treasury's obligation to make periodic interest payments
and its obligation to repay the amount borrowed. These stripped securities are
sold to investors separately. Stripped securities do not make periodic interest
payments. They are usually sold at a discount and then redeemed for their face
value on their maturity dates. These securities increase in value when interest
rates fall and lose value when interest rates rise. However, the
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Money Market Funds
Money market funds--which hold high-quality short-term debt obligations--provide
investors with a lower risk, highly liquid investment option. These funds
attempt to maintain a net asset value of $1 per share, although there can be no
guarantee that they will always be able to do so.
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5
<PAGE>
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How the Series Invests
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value of stripped securities generally fluctuates more in response to interest
rate movements than the value of traditional bonds. The Series may try to earn
money by buying stripped securities at a discount and either selling them after
they increase in value or holding them until they mature.
We will also purchase obligations such as, but not limited to,
mortgage-backed, asset-backed securities and certificates of deposit. All of the
Series' investments must be rated in one of the two highest rating categories by
at least two nationally recognized statistical rating organizations (NRSROs),
such as Moody's Investors Service (rated at least Prime-2) and Standard & Poor's
Ratings Group (rated at least A-2) or, if unrated, of comparable quality. A
rating is an assessment of the likelihood of timely payment of interest and
principal. All securities that we purchase will be denominated in U.S. dollars.
A mortgage-backed security is a pass-through security that directly or
indirectly represents an ownership interest in, or is payable from, fixed or
adjustable-rate mortgage loans generally secured by real property. There are
currently two basic types of mortgage-backed securities: (1) those issued or
guaranteed, directly or indirectly, by the U.S. Government or one of its
agencies or instrumentalities, such as GNMA or FNMA obligations and (2) those
issued or guaranteed privately. These securities are created by pooling
mortgages together and selling undivided interests in the pool. The payments on
the underlying mortgages are generally "passed through" to the holder of the
mortgage-backed security in monthly payments. Private mortgage pass-through
securities that are not guaranteed by the U.S. Government, its agencies or
instrumentalities, generally have one or more types of credit enhancement to
ensure timely receipt of payments and to protect against default.
An asset-backed security is another type of pass-through security issued or
guaranteed by U.S. governmental entities or privately that pays interest based
upon the cash flow of an underlying pool of assets, such as student loans.
A certificate of deposit is an obligation issued by or through a bank.
These instruments depend upon the strength of the bank involved in the borrowing
to give investors comfort that the borrowing will be repaid when promised. Some
certificates of deposit may be insured, such as certificates of deposit insured
by the Federal Deposit Insurance Corporation.
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6 Money Market Series [GRAPHIC] (800) 225-1852
<PAGE>
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How the Series Invests
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Debt obligations in general, including those listed above and any others
that we may purchase, are basically written promises to repay a debt. Among the
various types of debt securities we may purchase, the terms of repayment may
vary, as may the commitment of other parties to honor the obligations of the
issuer of the security.
The Series may also use repurchase agreements where a party agrees to sell
a security to the Series and then repurchase it at an agreed-upon price at a
stated time. This creates a fixed return for the Series.
Any of the money market instruments that the Series may purchase may be
accompanied with the right to resell at an agreed-upon price or yield the
instrument prior to the instrument's maturity. In addition, we may separately
purchase rights to resell these instruments. These rights are referred to as
"puts." The purchase of instruments with puts allows the Series to sell the
security when the investment adviser believes it is appropriate to do so to
honor redemption requests or to buy more attractive securities.
The securities that we may purchase may change over time as new types of
money market instruments are developed. We will purchase these new instruments,
however, only if their characteristics and features follow the rules governing
the operation of money market mutual funds.
For more information about this Series and its investments, see "Investment
Risks" and the Statement of Additional Information, "Descriptions of the Series,
their Investments and Risks." The Statement of Additional Information--which we
refer to as the SAI--contains additional information about the Series. To obtain
a copy, see the back cover of this prospectus.
The Series' investment objective is a fundamental policy that cannot be
changed without shareholder approval. The Board of Government Securities Trust
can change investment policies that are not fundamental.
ADDITIONAL STRATEGIES
We may use a number of investment strategies to try to improve the Series'
returns or protect its assets.
The Series may purchase money market obligations on a "when-issued" or
"delayed-delivery" basis. When the Series makes this type of purchase, the price
and interest rate are fixed at the time of purchase, but delivery and payment
for the obligations take place at a later time. The Series does not earn
interest income until the date the obligations are delivered.
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7
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How the Series Invests
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The Series also follows certain policies when it: borrows money (the Series
may borrow up to 20% of the value of its total assets); lends its securities to
others (the Series may lend up to 30% of the value of its total assets); and
holds illiquid securities (the Series may hold up to 10% of its net assets in
illiquid securities, including securities without a readily available market and
repurchase agreements with maturities longer than seven days). The Series is
subject to certain investment restrictions that are fundamental policies, which
means they cannot be changed without shareholder approval. For more information
about these restrictions, see the SAI.
INVESTMENT RISKS
The Series' investments in money market instruments involve both credit
risk--the possibility that the issuer will default, and market risk--the
possibility that an instrument will lose value because interest rates change or
investors lose confidence in the issuer's ability to pay back the debt. To limit
these risks, we invest at least 80% of the Series' total assets in U.S.
Government securities with short maturities, no more than 13 months.
This chart outlines the key risks and potential rewards of the Series'
principal investments. See, too, "Description of the Trust, Its Investments and
Risks," in the SAI.
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8 Money Market Series [GRAPHIC] (800) 225-1852
<PAGE>
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How the Series Invests
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<TABLE>
<CAPTION>
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Investment Type
% of Series' Total Assets Risks Potential Rewards
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<S> <C> <C>
High-quality money o Credit risk--The risk that default o Preservation of capital
market obligations of an issuer would leave the Series
of all types with unpaid interest or principal o Regular interest income
Up to 100% o Market risk--The risk that bonds o Generally are more secure than
and other debt instruments may lose lower quality debt securities and
value because interest rates change stock and other equity securities
or there is a lack of confidence in
a group of borrowers or an
industry.
o Limited potential for capital
appreciation
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Fixed and adjustable o Prepayment risk--the risk that the o Regular interest income
rate mortgage-backed underlying mortgage or other debt
securities and may be prepaid partially or o Pass-through instruments provide
asset-backed securities completely, generally during greater diversification than direct
periods of falling interest rates, ownership of loans
Percentage varies which could adversely affect yield
to maturity and require the Series o Certain mortgage-backed securities
to reinvest in lower-yielding may benefit from security interest
securities in real estate collateral
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</TABLE>
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9
<PAGE>
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How the Series Invests
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<TABLE>
<CAPTION>
- ------------------------
Investment Type (cont'd)
% of Series' Total Assets Risks Potential Rewards
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<S> <C> <C>
Fixed and adjustable o Credit risk--that the underlying
rate mortgage-backed mortgages or receivables will not
securities be paid by debtors or by credit
insurers or guarantors of such
Percentage varies instruments. Some private mortgage-
and asset-backed securities are
unsecured or secured by lower-rated
insurers or guarantors and thus may
involve greater risk
o Market risk
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Illiquid securities o May be difficult to value precisely o May offer a more attractive yield
or greater potential for growth
Percentage varies o May be difficult to sell at the than more widely traded securities
time and price desired
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</TABLE>
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10 Money Market Series [GRAPHIC] (800) 225-1852
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How the Series is Managed
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MANAGER
Prudential Investments Fund Management LLC (PIFM)
Gateway Center Three, 100 Mulberry Street
Newark, NJ 07102-4077
Under a management agreement with Government Securities Trust (the
"Trust"), PIFM manages the Series' investment operations and administers its
business affairs. For the fiscal year ended November 30, 1998, the Series paid
PIFM management fees of .40% of the Series' average net assets.
As of December 30, 1998, PIFM served as the Manager to all 46 of the
Prudential Mutual Funds, and as Manager or administrator to 22 closed-end
investment companies, with aggregate assets of approximately $70.5 billion.
INVESTMENT ADVISER
The Prudential Investment Corporation, called Prudential Investments, is the
Series' investment adviser. Its address is Prudential Plaza, 751 Broad Street,
Newark, NJ 07102. PIFM has responsibility for all investment advisory services,
supervises Prudential Investments and reimburses Prudential Investments for its
reasonable costs and expenses.
DISTRIBUTOR
Prudential Investment Management Services LLC (PIMS) distributes the Series'
shares under a Distribution Agreement with the Series. The Series has a
Distribution and Service Plan under Rule 12b-1 under the Investment Company Act
for Class A shares. Under the Plan and Distribution Agreement, PIMS pays the
expenses of distributing the Series' Class A and Class Z shares and provides
certain shareholder support services. The Series pays distribution and other
fees to PIMS as compensation for its services for Class A shares, but not for
Class Z shares. These fees--known as 12b-1 fees--are shown in the "Fees and
Expenses" table.
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11
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How the Series is Managed
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YEAR 2000 READINESS DISCLOSURE
The services provided to the Series and the shareholders by the Manager, the
Distributor, the Transfer Agent and the Custodian depend on the smooth
functioning of their computer systems and those of outside service providers.
Many computer software systems in use today cannot distinguish the year 2000
from the year 1900 because of the way dates are encoded and calculated. Such
event could have a negative impact on handling securities trades, payments of
interest and dividends, pricing and account services. The Manager, the
Distributor, the Transfer Agent and the Custodian have advised the Series that
they have been actively working on necessary changes to their computer systems
to prepare for the year 2000. The Series and its Directors receive and have
received since early 1998 satisfactory quarterly reports from the principal
service providers as to their preparations for year 2000 readiness, although
there can be no assurance that the service providers (or other securities market
participants) will successfully complete the necessary changes in a timely
manner or that there will be no adverse impact on the Series. Moreover, the
Series at this time has not considered retaining alternative service providers
or directly undertaken efforts to achieve year 2000 readiness, the latter of
which would involve substantial expenses without an assurance of success.
Additionally, issuers of securities generally as well as those purchased
by the Series may confront year 2000 compliance issues which, if material and
not resolved, could have an adverse impact on securities markets and/or a
specific issuer's performance and result in a decline in the value of the
securities held by the Series.
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12 Money Market Series [GRAPHIC] (800) 225-1852
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Series Distribution and Tax Issues
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Investors who buy shares of the Series should be aware of some important
tax issues. For example, the Series pays dividends and capital gains, if any, to
shareholders. These distributions are subject to taxes, unless you hold your
shares in a 401(k) plan, an Individual Retirement Account (IRA), or some other
qualified tax-deferred plan or account. Dividends and distributions from the
Series may also be subject to state income tax in the state in which you reside.
The following briefly discusses some of the important income tax issues you
should be aware of, but is not meant to be tax advice. For tax advice, please
speak with your tax adviser.
DISTRIBUTIONS
The Series pays dividends out of any net investment income plus short-term
capital gains, to shareholders every month. For example, if the Series owns a
U.S. Treasury security and the security pays interest, the Series will pay out a
portion of this interest as a dividend to its shareholders, assuming the Series'
income is more than its costs and expenses. The dividends you receive from the
Series will be taxed as ordinary income, whether or not they are reinvested in
the Series.
Although the Series is not likely to realize long-term capital gains
because of the types of securities we purchase, any such capital gains will be
paid to shareholders (typically once a year). Long-term capital gains are
generated when the Series sells assets which it held for more than 12 months for
a profit. For an individual, the maximum long-term capital gains rate is 20%.
For your convenience, Series dividends and distributions of capital gains
are automatically reinvested in the Series. If you ask us to pay the
distributions in cash, we will send you a check instead of purchasing more
shares of the Series. Otherwise, if your account is with a broker, you will
receive a credit to your account. Either way, the distributions are subject to
taxes, unless your shares are held in a qualified tax-deferred plan or account.
For more information about automatic reinvestment and other shareholder
services, see "Step 4: Additional Shareholder Services" in the next section.
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13
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Series Distribution and Tax Issues
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TAX ISSUES
Form 1099
Every year, you will receive a Form 1099, which reports the amount of dividends
and capital gains we distributed to you during the prior year. If you own shares
of the Series as part of a qualified tax-deferred plan or account, your taxes
are deferred, so you will not receive a Form 1099. However, you will receive a
Form 1099 when you take any distributions from your qualified tax-deferred plan
or account.
Series distributions are generally taxable to you in the year they are
received, except when we declare certain dividends in December of a calendar
year, and actually pay them in January of the following year. In such cases, the
dividends are treated as if they were paid on December 31 of the prior year.
Withholding Taxes
If federal law requires you to provide the Series with your tax identification
number and certifications as to your tax status, and you fail to do this, we
will withhold and pay to the U.S. Treasury 31% of your distributions. If you are
subject to backup withholding, we will withhold and pay to the U.S. Treasury 31%
of your distributions. Dividends of net investment income and short-term capital
gains paid to a nonresident foreign shareholder generally will be subject to a
U.S. withholding tax of 30%. This rate may be lower, depending on any tax treaty
the U.S. may have with the shareholder's country.
Qualified Retirement Plans
Retirement plans and accounts allow you to defer paying taxes on investment
income and capital gains. Contributions to these plans may also be tax
deductible, although distributions from these plans generally are taxable. In
the case of Roth IRA accounts, contributions are not tax deductible, but
distributions from the plan may be tax-free. Please contact your financial
adviser for information on a variety of Prudential Mutual Funds that are
suitable for retirement plans offered by Prudential.
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14 Money Market Series [GRAPHIC] (800) 225-1852
<PAGE>
How to Buy, Sell and
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Exchange Shares of the Series
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HOW TO BUY SHARES
Step 1: Open an Account
If you don't have an account with us or a securities firm that is permitted to
buy or sell shares of the Fund for you, call Prudential Mutual Fund Services LLC
(PMFS) at (800) 225-1852 or contact:
Prudential Mutual Fund Services LLC
Attn: Investment Services
P.O. Box 15020
New Brunswick, NJ 08906-5020
To purchase by wire, call the number above to obtain an application. After
PMFS receives your completed application, completion, you will receive an
account number. For additional information about purchasing shares of the
Series, see the back cover page of this prospectus. We have the right to reject
any purchase order (including an exchange into the Series) or suspend or modify
the Series' sale of its shares.
Purchases Through Prudential Securities
Automatic Investment (Autosweep) (for Non-Command Accounts). If you purchase
Class A shares of the Series through Prudential Securities, you may be able to
invest through automatic investment procedures (the Autosweep program). The
Autosweep program allows you to designate a money market fund as your primary
money sweep fund. If you do not designate a primary money sweep fund, the Series
will automatically be your primary money sweep fund. You have the option to
change your primary money sweep fund at any time by notifying your Prudential
Securities financial adviser.
When your Prudential Securities account has a credit balance (that is,
immediately available funds), Prudential Securities will purchase Class A shares
of the Series equal to that amount. This will occur on the business day
following confirmation that a credit balance exists, which is the second
business day after receipt of the purchase order by Prudential Securities.
Prudential Securities may use and retain the benefit of credit balances in your
account until Series shares are purchased.
Your investment in the Series will be held in the name of Prudential
Securities. Prudential Securities will receive all statements and dividends
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15
<PAGE>
How to Buy, Sell and
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Exchange Shares of the Series
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from the Series and will, in turn, send you account statements showing your
purchases, sales and dividends.
Automatic Purchase Procedures
Automatic Purchase Procedures. Credit balances of $1000 or more in your account
resulting from the proceeds of a securities sale, or credit balances of $10,000
or more resulting from a non-trade related credit (for example, receipt of a
dividend or interest payment, maturity of a bond or call or a payment into the
securities account), will automatically be invested in Class A shares of the
Series. Where your credit balance results from a sale of securities, the
available cash will be reinvested in the Series on settlement date. Where your
credit balance results from a non-trade related credit, the available cash will
be invested in the Series on the first business day after it is received by
Prudential Securities. For eligible credit balances of $1 or more not otherwise
described above, Class A shares will be purchased automatically on the last
business day of each month.
The following chart shows the frequency and amount of the sweep:
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Daily Monthly
Credit Balances resulting from the $1,000 or more
proceeds of a securities sales
Credit Balances resulting from a non- $10,000 or more
trade-related credit, including the
maturity of a bond or call
Remaining Credit Balances $1.00 or more
You will begin earning dividends on your shares purchased through Autosweep on
the day the order is placed. Prudential Securities will purchase Class A shares
of the Series at 4:30 p.m. New York time on the business day the order is placed
and payment for the shares will be made by 4:30 p.m. New York time on the next
business day.
Step 2: Choose a Share Class
Individual investors can choose between Class A and Class Z shares of the
Series, although Class Z shares are available only to a limited group of
investors.
When choosing a share class, you should consider the following:
o The amount of your investment
o Whether you qualify to purchase Class Z shares
- --------------------------------------------------------------------------------
16 Money Market Series [GRAPHIC] (800) 225-1852
<PAGE>
How to Buy, Sell and
- --------------------------------------------------------------------------------
Exchange Shares of the Series
- --------------------------------------------------------------------------------
Share Class Comparison. Use this chart to help you compare the Series' two share
classes. The discussion following this chart will tell you whether you are
entitled to a reduction or waiver of any sales charges.
- --------------------------------------------------------------------------------
Share Class Comparison Class A Class Z
- --------------------------------------------------------------------------------
Minimum purchase amount(1) $1,000 None
- --------------------------------------------------------------------------------
Minimum amount for subsequent purchases(1) $100 None
- --------------------------------------------------------------------------------
Maximum initial sales charge None None
- --------------------------------------------------------------------------------
Contingent Deferred Sales Charge (CDSC) None None
- --------------------------------------------------------------------------------
Annual distribution and service (12b-1) fees
(shown as a percentage of average net assets)(2) .125 of 1% None
- --------------------------------------------------------------------------------
(1) The minimum investment requirements do not apply to certain retirement and
employee savings plans and custodial accounts for minors. The minimum
initial and subsequent investment for purchases made through the Automatic
Investment Plan is $50. For more information, see "Additional Shareholder
Services-Automatic Investment Plan."
(2) These distribution fees are paid from the Series' assets on a continuous
basis. Over time, the fees will increase the cost of your investment and
may cost you more than paying other types of sales charges. The service fee
for Class A shares is at an annual rate of up to .125 of 1% of the average
daily net assets of Class A shares.
Qualifying for Class Z Shares
Class Z shares of the Series can be purchased by any of the following:
o Pension, profit-sharing or other employee benefit plans qualified
under Section 401 of the Internal Revenue Code and deferred
compensation and annuity plans under Sections 457 and 403(b)(7) of the
Internal Revenue Code -- which we call Benefit Plans -- and certain
non-qualified plans, provided the Benefit Plan in combination with
other plans sponsored by the same employer or group of related
employers has at least $50 million in defined contribution assets
o Participants in any fee-based program or trust program sponsored by
Prudential or an affiliate which includes mutual funds as investment
options and the Series as an available option
o Certain participants in the MEDLEY Program (group variable annuity
contracts) sponsored by Prudential for whom Class Z shares of the
Prudential Mutual Funds are an available option
- --------------------------------------------------------------------------------
17
<PAGE>
How to Buy, Sell and
- --------------------------------------------------------------------------------
Exchange Shares of the Series
- --------------------------------------------------------------------------------
o Benefit Plans for which an affiliate of the Distributor provides
administrative or recordkeeping services and, as of September 20,
1996, were either Class Z shareholders of the Prudential Mutual Funds
or executed a letter of intent to purchase Class Z shares of the
Prudential Mutual Funds
o The Prudential Securities Cash Balance Pension Plan, an
employee-defined benefit plan sponsored by Prudential Securities
o Current and former Directors/Trustees of the Prudential Mutual Funds
(including the Trust)
o Employees of Prudential and/or Prudential Securities who participate
in a Prudential-sponsored employee savings plan
o Prudential with an investment of $10 million or more
In connection with the sale of shares, the Manager, the Distributor or one
of their affiliates may pay brokers, financial advisers and other persons a
finder's fee for Class Z shares from their own resources based on a percentage
of the net asset value of shares sold or otherwise.
Step 3: Understanding the Price You'll Pay
Shares of a money market mutual fund, like the Series, are priced differently
than shares of common stock and other securities.
The price you pay for each share of the Series is based on the share value.
The share value of a mutual fund--known as the net asset value or NAV--is
determined by a simple calculation; it's the total value of the fund (assets
minus liabilities) divided by the total number of shares outstanding. In
determining NAV, the Series values its securities using the amortized cost
method. The Series seeks to maintain an NAV of $1.
We determine the NAV of our shares once each business day at 4:30 p.m. New
York time on days that the New York Stock Exchange is open for trading. We do
not determine NAV on days when we have not received any orders to purchase or
sell shares of the Series or when changes in the value of the Series' portfolio
do not materially affect the NAV.
- --------------------------------------------------------------------------------
18 Money Market Series [GRAPHIC] (800) 225-1852
<PAGE>
How to Buy, Sell and
- --------------------------------------------------------------------------------
Exchange Shares of the Series
- --------------------------------------------------------------------------------
What Price Will You Pay for Shares of the Series?
For Class A and Class Z shares, you will pay the NAV next determined after we
receive your order to purchase (remember, there are no up-front sales charges
for these share classes). Your broker may charge you a separate or additional
fee for purchases of shares.
Step 4: Additional Shareholder Services
As a Series shareholder, you can take advantage of the following services and
privileges:
Automatic Reinvestment. As we explained in the Series' Distributions and Tax
Issues section, the Series pays out--or distributes--its net investment income
and any capital gains to all shareholders. For your convenience, we will
automatically reinvest your distributions in the Series at NAV. If you want your
distributions paid in cash, you can indicate this preference on your
application, or notify your financial adviser, or notify the Transfer Agent in
writing (at the address below) not less than five full business days before the
date we determine who receives dividends. The mailing address of the Transfer
Agent is:
Prudential Mutual Fund Services LLC
Attn: Account Maintenance
P.O. Box 15015
New Brunswick, NJ 08906-5015
Automatic Investment Plan. You can make regular purchases of the Series for as
little as $50 by having the money automatically withdrawn from your bank or
brokerage account at specified intervals.
Retirement Plan Services. Prudential offers a wide variety of retirement plans
for individuals and institutions, including large and small businesses. For
information on IRAs, including Roth IRAs or SEP-IRAs for a one-person business,
please contact your financial adviser. If you are interested in opening a 401(k)
or other company-sponsored retirement plan (SIMPLES, SEP plans, Keoghs, 403(b)
plans, pension and profit-sharing plans), your financial
- --------------------------------------------------------------------------------
19
<PAGE>
How to Buy, Sell and
- --------------------------------------------------------------------------------
Exchange Shares of the Series
- --------------------------------------------------------------------------------
adviser will help you determine which retirement plan best meets your needs.
Complete instructions about how to establish and maintain your plan and how to
open accounts for you and your employees will be included in the retirement plan
kit you receive in the mail.
Systematic Withdrawal Plan. A systematic withdrawal plan is available that will
provide you with monthly or quarterly checks.
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 LLC, Attention: Customer Service, P.O. Box 15005, New Brunswick, New
Jersey 08906-5010, 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. Sub-accounts may be identified by name and
number within the master account name. The investment minimums set forth above
apply to the aggregate amounts invested by a group and not the amount credited
to each sub-account.
Reports to Shareholders. Every year we will send you an annual report (along
with an updated prospectus) and a semi-annual report, which contain important
financial information about the Series. To reduce expenses, we will send one
annual shareholder report, one semi-annual shareholder report and one annual
prospectus per household, unless you instruct us or your broker otherwise.
HOW TO SELL YOUR SHARES
You can sell your shares of the Series for cash (in the form of a check) at any
time, subject to certain restrictions.
When you sell shares of the Series--also known as redeeming your
shares--the price you will receive will be the NAV next determined after the
Transfer Agent, the Distributor or your broker receives your order to sell. If
- --------------------------------------------------------------------------------
20 Money Market Series [GRAPHIC] (800) 225-1852
<PAGE>
How to Buy, Sell and
- --------------------------------------------------------------------------------
Exchange Shares of the Series
- --------------------------------------------------------------------------------
your broker holds your shares, he must receive your order to sell by 4:30 p.m.
New York time to process the sale on that day. Otherwise, contact:
Prudential Mutual Fund Services LLC
Attn: Redemption Services
P.O. Box 15010
New Brunswick, NJ 08906-5010
Generally, we will pay you for the shares that you sell within seven days after
the Transfer Agent, the Distributor or your broker receives your sell order. If
you hold shares through a broker, payment will be credited to your account. If
you are selling shares you recently purchased with a check, we may delay sending
you the proceeds until your check clears, which can take up to 10 days from the
purchase date. You can avoid delay if you purchase by wire, certified check or
cashier's check. Your broker may charge you a separate or additional fee for
sales of shares.
Restrictions on Sales
There are certain times when you may not be able to sell shares of the
Series or when we may delay paying you the proceeds from a sale. This may
happen during unusual market conditions or emergencies when the Series can't
determine the value of its assets or sell its holdings. For more information,
see the SAI, "Purchase, Redemption and Pricing of Trust Shares -- Sale of
Shares."
If you are selling more than $50,000 of shares, you want the check sent to
someone or some place that is not in our records or you are a business or a
trust and if you hold your shares directly with the Transfer Agent, you may have
to have the signature on your sell order guaranteed by a financial institution.
For more information, see the SAI, "Purchase, Redemption and Pricing of Trust
Shares -- Sale of Shares --Signature Guarantee."
Redemption in Kind
If the sales of Series shares you make during any 90-day period reach the lesser
of $250,000 or 1% of the value of the Series' net assets, we can then give you
securities from the Series' portfolio instead of cash. If you want to sell the
securities for cash, you would have to pay the costs charged by a broker. For
more information, see the SAI, "Purchase, Redemption and Pricing of Trust
Shares."
- --------------------------------------------------------------------------------
21
<PAGE>
How to Buy, Sell and
- --------------------------------------------------------------------------------
Exchange Shares of the Series
- --------------------------------------------------------------------------------
Small Accounts
If you make a sale that reduces your account value to less than $500, we may
sell the rest of your shares and close your account. We would do this to
minimize the Series expenses paid by other shareholders. We will give you 60
days' notice, during which time you can purchase additional shares to avoid this
action. This involuntary sale does not apply to shareholders who own their
shares as part of a 401(k) plan, an IRA or some other tax-deferred plan or
account.
90-Day Repurchase Privilege
After you redeem your shares, you have a 90-day period during which you may
reinvest any of the redemption proceeds in shares of the same Series without
paying an initial sales charge. In order to take advantage of this one-time
privilege, you must notify the Transfer Agent or your broker at the time of the
repurchase. See the SAI, "Purchase, Redemption and Pricing of Trust Shares--Sale
of Shares."
Retirement Plans
To sell shares and receive a distribution from a retirement account, call your
broker or the Transfer Agent for a distribution request form. There are special
distribution and income tax withholding requirements for distributions from
retirement plans and you must submit a withholding form with your request to
avoid delay. If your retirement plan account is held for you by your employer or
plan trustee, you must arrange for the distribution request to be signed and
sent by the plan administrator or trustee. For additional information, see the
SAI.
Automatic Redemption for Autosweep
If you participate in the Autosweep program, your Series shares will be
automatically redeemed to cover any deficit in your Prudential Securities
account. The amount redeemed will be the nearest dollar amount necessary to
cover the deficit.
The amount of the redemption will be the lesser of the total value of
Series shares held in your Prudential Securities account or the deficit in your
Prudential Securities account. If you want to pay for a securities transaction
in your account other than through this procedure, you must deposit sufficient
cash in your securities account before the settlement date. If you use this
automatic redemption procedure and want to pay another deficit in your
securities account other than through this procedure, you must deposit
sufficient cash in your securities account before you incur the deficit.
Redemptions are automatically made by Prudential Securities, to the nearest
dollar, on each day to satisfy deficits from securities transactions or to honor
your redemption requests. Your account will be automatically scanned for
deficits each day and, if there is insufficient cash in your account, we will
redeem an appropriate number of shares of the Series at the next determined NAV
to satisfy any remaining deficit. You are entitled to any dividend declared on
the redeemed shares through the day before the redemption is made. Dividends
declared on the redemption date will be retained by Prudential Securities, which
has advanced monies to satisfy deficits in your account.
HOW TO EXCHANGE YOUR SHARES
You can exchange your shares of the Series for shares of other series of the
Trust of the same class and certain other Prudential Mutual Funds--including
certain money market funds--if you satisfy the minimum investment requirements.
For example, you can exchange Class A shares of the Fund for Class A shares of
another Prudential Mutual Fund, on the basis of the relative NAV plus the
applicable sales charge, but you can't exchange Class A shares for Class B,
Class C or Class Z shares. We may change the terms of the exchange privilege
after giving you 60 days' notice.
- --------------------------------------------------------------------------------
22 Money Market Series [GRAPHIC] (800) 225-1852
<PAGE>
How to Buy, Sell and
- --------------------------------------------------------------------------------
Exchange Shares of the Series
- --------------------------------------------------------------------------------
If you hold shares through a broker, you must exchange shares through your
broker. Otherwise contact:
Prudential Mutual Fund Services LLC
Attn: Exchange Processing
P.O. Box 15010
New Brunswick, NJ 08906-5010
Frequent Trading
Frequent trading of Series shares in response to short-term fluctuations in the
market--also known as "market timing"--may make it very difficult to manage the
Series' investments. When market timing occurs, the Series may have to sell
portfolio securities to have the cash necessary to redeem the market timer's
shares. This can happen at a time when it is not advantageous to sell any
securities, so the Series' performance may be hurt. When large dollar amounts
are involved, market timing can also make it difficult to use long-term
investment strategies because we cannot predict how much cash the Series will
have to invest. When in our opinion such activity would have a disruptive effect
on portfolio management, the Series reserves the right to refuse purchase orders
and exchanges into the Series by any person, group or commonly controlled
accounts. The Series may notify a market timer of rejection of an exchange or
purchase order after the day the order is placed. If the Series allows a market
timer to trade Series shares, it may require the market timer to enter into a
written agreement to follow certain procedures and limitations.
- --------------------------------------------------------------------------------
23
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
The financial highlights will help you evaluate the Series' financial
performance. The total return in the chart represents the rate that a
shareholder earned on an investment in the Series, assuming reinvestment of all
dividends and other distributions. The information is for each share class for
the periods indicated.
Review this chart with the financial statements and report of independent
accountants, which appear in the annual report and the SAI and are available
upon request. Additional performance information is contained in the annual
report, which you can receive at no charge.
Class A Shares
The financial highlights for the five-year period ended November 30, 1998 were
audited by [ ], independent accountants, whose report was
unqualified.
<TABLE>
<CAPTION>
- --------------------------------------------
Class A Shares (fiscal years ended 11-30-98)
- -------------------------------------------------------------------------------------------------------------------
Per Share Operating Performance 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $1.000 $1.000 $1.000 $1.000
Net investment income 0.48 .046 .052 .033
Dividends from net investment income (0.48) (.046) (.052) (.033)
Net asset value, end of year $1.000 $1.000 $1.000 $1.000
Total return(1) 4.87% 4.74% 5.20% 3.29%
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Ratios/Supplemental Data 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net assets, end of year (000) $591,428 $552,123 $598,194 $637,343
Average net assets (000) $586,513 $589,147 $597,599 $732,867
Ratios to average net assets:
Expenses, including distribution fees .77% .86% .78% .77%
Expenses, excluding distribution fees .64% .73% .65% .64%
Net investment income 4.77% 4.63% 5.15% 3.19%
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Total return assumes reinvestment of dividends and any other distributions.
It is calculated assuming shares are purchased on the first day and sold on
the last day of each period reported.
- --------------------------------------------------------------------------------
24 Money Market Series [GRAPHIC] (800) 225-1852
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
Class Z Shares
The financial highlights for the two-year period ended November 30, 1998 and for
the period from March 1, 1996 through November 30, 1996 were audited by [ ],
independent accountants, whose report was unqualified.
- --------------------------------------------
Class Z Shares (fiscal years ended 11-30-98)
- --------------------------------------------------------------------------------
Per Share Operating Performance 1998 1997 1996(1)
- --------------------------------------------------------------------------------
Net asset value, beginning of period $1.000 $1.000 $1.000
Net investment income .048 .038
Dividends from net investment income (.048) (.038)
Net asset value, end of period $1.000 $1.000
Total return(2) 5.03% 3.87%
- --------------------------------------------------------------------------------
Ratios/Supplemental Data 1998 1997 1996
- --------------------------------------------------------------------------------
Net assets, end of period (000) $581 $204(4)
Average net assets (000) $672 $1,962
Ratio of average net assets:
Expenses .64% .68%
Net investment income 4.92% 4.68%
- --------------------------------------------------------------------------------
(1) Information shown is for the period from March 1, 1996 (when Class Z shares
were first offered) through November 30, 1996.
(2) Total return assumes reinvestment of dividends and any other distributions.
It is calculated assuming shares are purchased on the first day and sold on
the last day of each period reported. Total return for periods of less than
a full year is not annualized.
(3) Annualized.
(4) Figure is actual and not rounded to nearest thousand.
- --------------------------------------------------------------------------------
25
<PAGE>
- --------------------------------------------------------------------------------
The Prudential Mutual Fund Family
- --------------------------------------------------------------------------------
Prudential offers a broad range of mutual funds designed to meet your individual
needs. For information about these funds, contact your financial adviser or call
us at (800) 225-1852. Read the prospectus carefully before you invest or send
money.
STOCK FUNDS Prudential Active Balanced Fund
Prudential Distressed Securities GLOBAL FUNDS
Fund, Inc.
Prudential Emerging Growth Fund, Inc. Global Stock Funds
Prudential Equity Fund, Inc. Prudential Developing Markets Fund
Prudential Equity Income Fund Prudential Developing Markets
Prudential Index Series Fund Equity Fund
Prudential Small-Cap Index Fund Prudential Latin America Equity Fund
Prudential Stock Index Fund Prudential Europe Growth Fund, Inc.
The Prudential Investment Prudential Global Genesis Fund, Inc.
Portfolios, Inc. Prudential Index Series Fund
Prudential Jennison Growth Fund Prudential Europe Index Fund
Prudential Jennison Growth & Prudential Pacific Index Fund
Income Fund Prudential Natural Resources
Prudential Mid-Cap Value Fund Fund, Inc.
Prudential Real Estate Securities Fund Prudential Pacific Growth Fund, Inc.
Prudential Small-Cap Quantum Prudential World Fund, Inc.
Fund, Inc. Global Series
Prudential Small Company Value International Stock Series
Fund, Inc. Global Utility Fund, Inc.
Prudential Tax-Managed Equity Fund
Prudential 20/20 Focus Fund Global Bond Funds
Prudential Utility Fund, Inc. Prudential Global Limited Maturity
Nicholas-Applegate Fund, Inc. Fund, Inc.
Nicholas-Applegate Growth Limited Maturity Portfolio
Equity Fund Prudential Intermediate Global
Income Fund, Inc.
Asset Allocation/Balanced Funds Prudential International Bond
Prudential Balanced Fund Fund, Inc.
Prudential Diversified Funds The Global Total Return Fund, Inc.
Conservative Growth Fund
Moderate Growth Fund
High Growth Fund
The Prudential Investment
Portfolios, Inc.
- --------------------------------------------------------------------------------
26 Money Market Series [GRAPHIC] (800) 225-1852
<PAGE>
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[This page has been left blank intentionally.]
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27
<PAGE>
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[This page has been left blank intentionally.]
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28 Money Market Series [GRAPHIC] (800) 225-1852
<PAGE>
FOR MORE INFORMATION:
- --------------------------------------------------------------------------------
Please read this prospectus before you You can also obtain copies of Fund
invest in the Fund and keep it for documents from the Securities and
future reference. For information or Exchange Commission as follows:
shareholder questions contact:
By Mail:
Prudential Mutual Fund Services LLC Securities and Exchange Commission
P.O. Box 15005 Public Reference Section
New Brunswick, NJ 08906-5005 Washington, DC 20549-6009
(800) 225-1852 (The SEC charges a fee to copy
(732) 417-7555 documents.)
(if calling from outside the U.S.)
In Person:
- -------------------------------------- Public Reference Room in
Outside Brokers Should Contact: Washington, DC
Prudential Investment Management (For hours of operation, call
Services LLC 1(800) SEC-0330)
P.O. Box 15035
New Brunswick, NJ 08906-5035 Via the Internet:
(800) 778-8769 http://www.sec.gov
- -------------------------------------- -------------------------------------
Visit Prudential's Web Site At: CUSIP Numbers:
http://www.prudential.com Class A: 744342106
Class Z: 744342601
- -------------------------------------- Investment Company Act File No:
Additional information about the Fund 811-3264
can be obtained without charge and can
be found in the following documents:
Statement of Additional
Information (SAI)
(incorporated by reference into
this prospectus)
Annual Report
Semi-Annual Report
MF100A [LOGO] E Printed on Recycled Paper
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
FUND TYPE:
- ---------------------------------------
Money Market
INVESTMENT OBJECTIVE:
- ---------------------------------------
High current income consistent
with the preservation of
principal and liquidity
Prudential
Government
Securities Trust
- --------------------------------------------------------------------------------
U.S. TREASURY MONEY MARKET SERIES
PROSPECTUS DATED APRIL __, 1999.
As with all mutual funds, filing this prospectus with the Securities and
Exchange Commission has not approved the Trust shares, nor has the SEC
determined that this prospectus is complete or accurate. It is a criminal
offense to state otherwise.
[LOGO] Prudential
Investments
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
Table of Contents
- --------------------------------------------------------------------------------
1 Risk/Return Summary
1 Investment Objective and Principal Strategies
1 Principal Risks
2 Evaluating Performance
3 Fees and Expenses
5 How the Series Invests
5 Investment Objective and Policies
6 Additional Strategies
7 Investment Risks
8 How the Series is Managed
8 Manager
8 Investment Adviser
8 Distributor
9 Year 2000 Readiness Disclosure
10 Series Distributions and Tax Issues
10 Distributions
11 Tax Issues
12 How to Buy, Sell and Exchange Shares of the Series
12 How to Buy Shares
20 How to Sell Your Shares
22 How to Exchange Your Shares
25 Financial Highlights
25 Class A Shares
26 Class Z Shares
27 The Prudential Mutual Fund Family
For More Information (Back Cover)
- --------------------------------------------------------------------------------
ii U.S. Treasury Money Market Series [GRAPHIC] (800) 225-1852
<PAGE>
- --------------------------------------------------------------------------------
Risk/Return Summary
- --------------------------------------------------------------------------------
This section highlights key information about the U.S. Treasury Money Market
Series, which we refer to as "the Series." Additional information follows this
summary.
INVESTMENT OBJECTIVE AND PRINCIPAL STRATEGIES
Our investment objective is high current income consistent with the preservation
of principal and liquidity. To achieve our objective, we invest exclusively in
U.S. Treasury obligations that mature in thirteen months or less. While we make
every effort to achieve our investment objective and maintain a net asset value
of $1 per share, we can't guarantee success. To date, the Series' net asset
value has never deviated from $1 per share.
PRINCIPAL RISKS
Although we try to invest wisely, all investments involve risk. The money market
securities in which the Series invests are generally subject to the risk that
the obligations may lose value because interest rates change. In addition,
certain securities may be subject to the risk that the issuer may be unable to
make principal and interest payments when they are due. Although investments in
mutual funds involve risk, investing in money market portfolios like the Series
is generally less risky than investing in other types of funds. This is because
the Series invests only in U.S. Treasury obligations, limits the average
maturity of the portfolio to 90 days or less, and limits the maturity of any
security to no more than thirteen months. For more detailed information about
the risks associated with the Series, see "Investment Risks."
An investment in the Series is not a bank deposit and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency. Although the Series seeks to preserve the value of your investment at $1
per share, it is possible to lose money by investing in the Series.
- --------------------------------------------------------------------------------
1
<PAGE>
- --------------------------------------------------------------------------------
Risk/Return Summary
- --------------------------------------------------------------------------------
EVALUATING PERFORMANCE
A number of factors--including risk--affect how the Series performs. The
following bar chart and table show the Series' performance over the past 10
years. They demonstrate the risk of investing in the Series and how returns can
change. Past performance does not mean that the Series will achieve similar
results in the future. For current yield information, you can call us at (800)
225-1852 (toll free).
- ----------------------------------
Annual Returns (Class A Shares)(1)
- --------------------------------------------------------------------------------
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
- --------------------------------------------------------------------------------
[BAR CHART HERE]
- --------------------------------------------------------------------------------
BEST QUARTER: ?% (?nd quarter of 199?) WORST QUARTER: ?% (?rd quarter of 199?)
- --------------------------------------------------------------------------------
(1) The Series' year-to-date return as of [_______________] was __%.
- ---------------------------------------
Average Annual Returns (as of 12-31-98)
- --------------------------------------------------------------------------------
1 YR 5 YRS 10 YRS (SINCE INCEPTION)
- --------------------------------------------------------------------------------
Class A Shares __% __% n/a __% (since 12-3-90)
- --------------------------------------------------------------------------------
Class Z Shares __% n/a n/a __% (since 2-21-97)
- --------------------------------------------------------------------------------
Lipper Average(2) __% __% __% *
- --------------------------------------------------------------------------------
7-Day yield (as of December 31, 1998)(1) %
- --------------------------------------------------------------------------------
(1) The Series' returns and yield are after deduction of expenses.
(2) The Lipper Average is based on the average return of all mutual funds in
the Lipper [U.S. Treasury Fund] category and does not include the effect of
any sales charges. These returns would be lower if they included the effect
of sales charges.
* Lipper returns since inception of each class are __% for Class A, and __%
for Class Z shares. Source: Lipper, Inc.
- --------------------------------------------------------------------------------
2 U.S. Treasury Money Market Series [GRAPHIC] (800) 225-1852
<PAGE>
- --------------------------------------------------------------------------------
Risk/Return Summary
- --------------------------------------------------------------------------------
FEES AND EXPENSES
This table shows the fees and expenses for each share class of the Series
- --Class A and Class Z. Class Z shares are available only to a limited group of
investors. For more information about which share class may be right for you,
see "How to Buy, Sell and Exchange Shares of the Series."
- --------------------------------------------------------
Shareholder Fees(1) (paid directly from your investment)
- --------------------------------------------------------------------------------
CLASS A CLASS Z
- --------------------------------------------------------------------------------
Maximum sales charge (load) imposed on
purchases (as a percentage of offering price) None None
- --------------------------------------------------------------------------------
Maximum deferred sales charge (load)
(as a percentage of the lower of original
price or sale proceeds) None None
- --------------------------------------------------------------------------------
Maximum sales charge (load) imposed
on reinvested dividends and other distributions None None
- --------------------------------------------------------------------------------
Redemption fees None None
- --------------------------------------------------------------------------------
Exchange fee None None
- --------------------------------------------------------------------------------
- --------------------------------------------------------------
Annual Series Operating Expenses (deducted from Series assets)
- --------------------------------------------------------------------------------
CLASS A CLASS Z
- --------------------------------------------------------------------------------
Management fees 0.400% 0.400%(1)
- --------------------------------------------------------------------------------
+ Distribution (12b-1) and service fees 0.125% None
- --------------------------------------------------------------------------------
+ Other expenses 0.125% 0.12%
- --------------------------------------------------------------------------------
= Total annual Series operating expenses 0.650% 0.52%(1)
- --------------------------------------------------------------------------------
(1) Your broker may charge you a separate or additional fee for purchase and
sale of shares.
- --------------------------------------------------------------------------------
3
<PAGE>
- --------------------------------------------------------------------------------
Risk/Return Summary
- --------------------------------------------------------------------------------
EXAMPLE
This example will help you compare the fees and expenses of the Series' two
share classes and compare the cost of investing in the Series with the cost of
investing in other mutual funds.
The example assumes that you invest $10,000 in the Series for the time
periods indicated and then sell all of your shares at the end of those periods.
The example also assumes that your investment has a 5% return each year and that
the Series' operating expenses remain the same. Although your actual costs may
be higher or lower, based on these assumptions your costs would be:
- --------------------------------------------------------------------------------
1 YR 3 YRS 5 YRS 10 YRS
- --------------------------------------------------------------------------------
Class A $__ $__ $__ $__
- --------------------------------------------------------------------------------
Class Z $__ $__ $__ $__
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4 U.S. Treasury Money Market Series [GRAPHIC] (800) 225-1852
<PAGE>
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How the Series Invests
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INVESTMENT OBJECTIVE AND POLICIES
The Series' investment objective is high current income consistent with the
preservation of principal and liquidity. While we make every effort to achieve
our objective, we can't guarantee success.
The Series invests exclusively in U.S. Treasury obligations to try to
provide investors with high current income while maintaining a stable net asset
value of $1 per share. We manage the Series to comply with specific rules
designed for money market mutual funds. The Series will invest in U.S. Treasury
securities, including bills, notes and bonds. These instruments are direct
obligations of the U.S. Government and, as such, are backed by the "full faith
and credit" of the United States. They differ primarily in their interest rates
and the lengths of their maturities.
The U.S. Treasury sometimes "strips" Treasury debt obligations into their
component parts: the Treasury's obligation to make periodic interest payments
and its obligation to repay the amount borrowed. These stripped securities are
sold to investors separately. Stripped securities do not make periodic interest
payments. They are usually sold at a discount and then redeemed for their face
value on their maturity dates. These securities increase in value when interest
rates fall and lose value when interest rates rise. However, the value of
stripped securities generally fluctuates more in response to interest rate
movements than the value of traditional bonds. The Series may try to earn money
by buying stripped securities at a discount and either selling them after they
increase in value or holding them until they mature.
Debt obligations in general, including U.S. Treasury obligations, are
basically written promises to repay a debt. Among the various types of debt
securities we may purchase, the terms of repayment may vary, as may the
commitment of other parties to honor the obligations of the issuer of the
security.
The securities that we may purchase may change over time as new types of
money market instruments are developed. We will purchase these
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Money Market Funds
Money market funds--which hold high-quality short-term debt obligations--provide
investors with a lower risk, highly liquid investment option. These funds
attempt to maintain a net asset value of $1 per share, although there can be no
guarantee that they will always be able to do so.
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5
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How the Series Invests
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new instruments, however, only if their characteristics and features follow the
rules governing the operation of money market mutual funds.
For more information about this Series and its investments, see "Investment
Risks" and the Statement of Additional Information, "Description of the Series,
their Investments and Risks." The Statement of Additional Information--which we
refer to as the SAI--contains additional information about the Series. To obtain
a copy, see the back cover of this prospectus.
The Series' investment objective is a fundamental policy that cannot be
changed without shareholder approval. The Board of Government Securities Trust
can change investment policies that are not fundamental.
ADDITIONAL STRATEGIES
We may use a number of investment strategies to try to improve the Series'
returns or protect its assets.
The Series may also purchase money market obligations on a "when-issued" or
"delayed-delivery" basis. When the Series makes this type of purchase, the price
and interest rate are fixed at the time of purchase, but delivery and payment
for the obligations take place at a later time. The Series does not earn
interest income until the date the obligations are delivered.
The Series also follows certain policies when it: borrows money (the Series
may borrow up to 20% of the value of its total assets). The Series is subject to
certain investment restrictions that are fundamental policies, which means they
cannot be changed without shareholder approval. For more information about these
restrictions, see the SAI.
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6 U.S. Treasury Money Market Series [GRAPHIC] (800) 225-1852
<PAGE>
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How the Series Invests
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INVESTMENT RISKS
The Series' investments in money market instruments involve both credit
risk--the possibility that the borrower can't pay back the money borrowed or
make interest payments, and market risk--the possibility that an instrument will
lose value because interest rates change or investors lose confidence in the
issuer's ability to pay back the debt. To limit these risks, we invest only in
U.S. Treasury securities, which are of the highest possible credit quality.
This chart outlines the key risks and potential rewards of the Series'
principal investments. See, too, "Descriptions of the Trust, Its Investments and
Risks," in the SAI.
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U.S. Treasury o Credit risk--The risk that o Limited potential for
Securities default of an issuer would capital appreciation
leave the Series with unpaid
100% interest or principal o Preservation of capital
o Market risk--The risk that o Regular interest income
bonds and other debt
instruments may lose value o Generally are more secure
because interest rates change than lower quality debt
or there is a lack of securities and stock and
confidence in a group of equity securities
borrowers or an industry.
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7
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How the Series is Managed
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MANAGER
Prudential Investments Fund Management LLC (PIFM)
Gateway Center Three, 100 Mulberry Street
Newark, NJ 07102-4077
Under a management agreement with Government Securities Trust (the
"Trust"), PIFM manages the Fund's investment operations and administers its
business affairs. For the fiscal year ended November 30, 1998, the Series paid
PIFM management fees of .40% of the Series' average net assets.
As of December 30, 1998, PIFM served as the Manager to all 46 of the
Prudential Mutual Funds, and as Manager or administrator to 22 closed-end
investment companies, with aggregate assets of approximately $70.5 billion.
INVESTMENT ADVISER
The Prudential Investment Corporation, called Prudential Investments,
is the Series' investment adviser. Its address is Prudential Plaza, 751 Broad
Street, Newark, NJ 07102. PIFM has responsibility for all investment advisory
services, supervises Prudential Investments and reimburses Prudential
Investments for its reasonable costs and expenses.
DISTRIBUTOR
Prudential Investment Management Services LLC (PIMS) distributes the Series'
shares under a Distribution Agreement. The Series has a Distribution and Service
Plan under Rule 12b-1 under the Investment Company Act for Class A Shares. Under
the Plan and Distribution Agreement, PIMS pays the expenses of distributing the
Series' Class A and Class Z shares and provides certain shareholder support
services. The Series pays distribution and other fees to PIMS as compensation
for its services for Class A shares, but not for Class Z shares. These
fees--known as 12b-1 fees--are shown in the "Fees and Expenses" table.
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8 U.S. Treasury Money Market Series [GRAPHIC] (800) 225-1852
<PAGE>
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How the Series is Managed
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YEAR 2000 READINESS DISCLOSURE
The services provided to the Series and the shareholders by the Manager, the
Distributor, the Transfer Agent and the Custodian depend on the smooth
functioning of their computer systems and those of outside service providers.
Many computer software systems in use today cannot distinguish the year 2000
from the year 1900 because of the way dates are encoded and calculated. Such
event could have a negative impact on handling securities trades, payments of
interest and dividends, pricing and account services. The Manager, the
Distributor, the Transfer Agent and the Custodian have advised the Series that
they have been actively working on necessary changes to their computer systems
to prepare for the year 2000. The Series and its Directors receive and have
received since early 1998 satisfactory quarterly reports from the principal
service providers as to their preparations for year 2000 readiness, although
there can be no assurance that the service providers (or other securities market
participants) will successfully complete the necessary changes in a timely
manner or that there will be no adverse impact on the Series. Moreover, the
Series at this time has not considered retaining alternative service providers
or directly undertaken efforts to achieve year 2000 readiness, the latter of
which would involve substantial expenses without an assurance of success.
Additionally, issuers of securities generally as well as those purchased by
the Series may confront year 2000 compliance issues which, if material and not
resolved, could have an adverse impact on securities markets and/or a specific
issuer's performance and result in a decline in the value of the securities held
by the Series.
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9
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Series Distributions and Tax Issues
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Investors who buy shares of the Series should be aware of some important tax
issues. For example, the Series pays dividends and capital gains, if any, to
shareholders. These distributions are subject to taxes, unless you hold your
shares in a 401(k) plan, an Individual Retirement Account (IRA), or some other
qualified tax-deferred plan or account.
The following briefly discusses some of the important income tax issues you
should be aware of, but is not meant to be tax advice. For tax advice, please
speak with your tax adviser.
DISTRIBUTIONS
The Series pays dividends out of any net investment income plus short-term
capital gains, to shareholders every month. For example, if the Series owns a
U.S. Treasury security and the security pays interest, the Series will pay out a
portion of this interest as a dividend to its shareholders, assuming the Series'
income is more than its costs and expenses.The dividends you receive from the
Series will be taxed as ordinary income, whether or not they are reinvested in
the Series.
Although the Series is not likely to realize long-term capital gains
because of the types of securities we purchase, any such capital gains will be
paid to shareholders (typically once a year). Long-term capital gains are
generated when the Series sells its assets which it held for more than 12 months
for a profit. For an individual, the maximum long term capital gains rate is
20%.
For your convenience, Series dividends and distributions of capital gains
are automatically reinvested in the Series. If you ask us to pay the
distributions in cash, we will send you a check instead of purchasing more
shares of the Series. Otherwise, if your account is with a broker, you will
receive a credit to your account. Either way, the distributions are subject to
taxes, unless your shares are held in a qualified tax-deferred plan or account.
For more information about automatic reinvestment and other shareholder
services, see "Step 4: Additional Shareholder Services" in the next section.
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10 U.S. Treasury Money Market Series [GRAPHIC] (800) 225-1852
<PAGE>
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Series Distributions and Tax Issues
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TAX ISSUES
Form 1099
Every year, you will receive a Form 1099, which reports the amount of dividends
and capital gains we distributed to you during the prior year. If you own shares
of the Series as part of a qualified tax-deferred plan or account, your taxes
are deferred, so you will not receive a Form 1099. However, you will receive a
Form 1099 when you take any distributions from your qualified tax-deferred plan
or account.
Series distributions are generally taxable to you in the year they are
received, except when we declare certain dividends in December of a calendar
year, and actually pay them in January of the following year. In such cases, the
dividends are treated as if they were paid on December 31 of the prior year.
Withholding Taxes
If federal law requires you to provide the Series with your tax identification
number and certifications as to your tax status, and you fail to do this, we
will withhold and pay to the U.S. Treasury 31% of your distributions. If you are
subject to backup withholding, we will withhold and pay to the U.S. Treasury 31%
of your distributions. Dividends of net investment income and short-term capital
gains paid to a nonresident foreign shareholder generally will be subject to a
U.S. withholding tax of 30%. This rate may be lower, depending on any tax treaty
the U.S. may have with the shareholder's country.
Qualified Retirement Plans
Retirement plans and accounts allow you to defer paying taxes on investment
income and capital gains. Contributions to these plans may also be tax
deductible, although distributions from these plans generally are taxable. In
the case of Roth IRA accounts, contributions are not tax deductible, but
distributions from the plan may be tax-free. Please contact your financial
adviser for information on a variety of Prudential Mutual Funds that are
suitable for retirement plans offered by Prudential.
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11
<PAGE>
How to Buy, Sell and
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Exchange Shares of the Series
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HOW TO BUY SHARES
Step 1: Open an Account
If you don't have an account with us or a securities firm that is permitted to
buy or sell shares of the Fund for you, call Prudential Mutual Fund Services LLC
(PMFS) at (800) 225-1852 or contact:
Prudential Mutual Fund Services LLC
Attn: Investment Services
P.O. Box 15020
New Brunswick, NJ 08906-5020
To purchase by wire, call the number above to obtain an application. After
PMFS receives your completed application, completion, you will receive an
account number. For additional information about purchasing shares of the
Series, see the back cover page of this prospectus. We have the right to reject
any purchase order (including an exchange into the Series) or suspend or modify
the Series' sale of its shares.
Purchases Through Prudential Securities
Automatic Investment (Autosweep for Non-Command Accounts) If you purchase Class
A Shares of the Series through Prudential Securities, you may be able to invest
through automatic investment procedures (the Autosweep Program). The Autosweep
program allows you to designate a money market fund as your primary money sweep
fund. If you do not designate a primary money sweep fund, the Series will
automatically be your primary money sweep fund. You have the option to change
your primary money sweep fund at any time by notifying your Prudential
Securities financial advisor.
When your Prudential Securities account has a credit balance (that is,
immediately available funds), Prudential Securities will purchase Class A shares
of the Series equal to that amount. This will occur on the business day
following confirmation that a credit balance exists, which is the second
business day after receipt of the purchase order by Prudential Securities.
Prudential Securities may use and retain the benefit of credit balances in your
account until Series shares are purchased.
Your investment in the Series will be held in the name of Prudential Securities.
Prudential Securities will receive all statements and dividends
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12 U.S. Treasury Money Market Series [GRAPHIC] (800) 225-1852
<PAGE>
How to Buy, Sell and
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Exchange Shares of the Series
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from the Series and will, in turn, send you account statements showing your pur-
chases, sales and dividends.
Automatic Purchase Procedures
Automatic Purchase Procedures. Credit balances of $1000 or more in your account
resulting from the proceeds of a securities sale, or credit balances of $10,000
or more resulting from a non-trade related credit (for example, receipt of a
dividend or interest payment, maturity of a bond or call or a payment into the
securities account), will automatically be invested in Class A shares of the
Series. Where your credit balance results from a sale of securities, the
available cash will be reinvested in the Series on settlement date. Where your
credit balance results from a non-trade related credit, the available cash will
be invested in the Series on the first business day after it is received by
Prudential Securities. For eligible credit balances of $1 or more not otherwise
described above, Class A shares will be purchased automatically on the last
business day of each month.
The following chart shows the frequency and amount of the sweep:
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Daily Monthly
Credit Balances resulting from the proceeds of a $1,000 or more
securities sale
Credit Balances resulting from a non-
trade-related credit, including the maturity of a $10,000 or more
bond or call
Remaining Cedit Balances $1.00 or more
You will begin earning dividends on your shares purchased through Autosweep
on the day the order is placed. Prudential Securities will purchase Class A
shares of the Series at 4:30 p.m. New York time on the business day the order is
placed and payment for the shares will be made by 4:30 p.m. New York Time on the
next business day.
Purchases Through The Prudential Advantage Account Program
The Prudential Advantage Account Program (the Advantage Account Program) is
a financial services program available to clients of Pruco Securities
Corporation (Prusec) and provides for an automatic investment procedure similar
to the Autosweep program. The Advantage Account Program allows you to designate
a market money fund as your primary money sweep fund. If
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13
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How to Buy, Sell and
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Exchange Shares of the Series
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you do not designate a primary money sweep fund, the Trust will automatically be
your primary money sweep fund. You have the option to change your primary money
sweep fund at any time by notifying your Prusec financial adviser.
When your Prusec securities account has a credit balance (that is,
immediately available funds) your Financial Representative will purchase Class
A shares of the Fund equal to that amount. This will occur on the business day
following confirmation that a credit balance exists. Prudential Securities,
which arranges for the investment of the credit balance in Class A shares, may
use and retain the benefit of credit balances in your account until Fund shares
are purchased (that is, until the next business day).
Your investment in the Fund will be held in the name of Prudential
Securities. Prudential Securities will receive all statements and dividends from
the Fund and will, in turn, send you account statements showing your purchases,
sales and dividends.
The charges and expenses of the Advantage Account Program are not reflected
in the Shareholder Fees and Expenses table. For information about participating
in the Advantage Account Program, you should call (800) 235-7637 (toll free).
Automatic Purchase Procedures. Credit balances of $1 or more in your account
will automatically be invested in Class A shares of the Fund. Where your credit
balance results from a sale of securities, the available cash will be reinvested
in the Fund on settlement date. Where your credit balance results from any other
transaction (that is, receipt of a dividend or interest payment, maturity of a
bond or your own cash payment to your securities account), the available cash
will be invested in the Fund on the first business day after it is received by
Prudential Securities. All available cash in your account, regardless of its
source, will automatically be invested.
You will begin earning dividends on your shares purchased through the
Advantage Account Program on the day the order is placed. Prudential Securities
will purchase shares of the Fund at 4:30 p.m. New York time on the business day
the order is placed and payment for the shares will be made by 4:30 p.m. New
York time on the next business day.
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14 U.S. Treasury Money Market Series [GRAPHIC] (800) 225-1852
<PAGE>
How to Buy, Sell and
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Exchange Shares of the Series
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[COMMAND Account(sm) Program
Shares of the Series are offered to participants in the Prudential
Securities COMMAND Accountsm program, an integrated financial services program
of Prudential Securities. Investors having a Command Account may select the
Series as their primary fund. Such investors will have the free credit cash
balances of $1.00 or more in their Securities Account (Available Cash) (a
component of the COMMAND Account Program) automatically invested in shares of
the Series as described below. In the case of Available Cash resulting from the
proceeds of securities sales, an order to purchase shares of the Series is
placed on the settlement date of the securities. In the case of Available cash
resulting from non-trade related credits (i.e., receipt of dividends and
interest payments, or a cash payment by the participant into his or her
Securities Account), the order to purchase shares of the Series is placed on the
business day after receipt by Prudential Securities of the non-trade related
credit. These automatic purchase procedures are also applicable for Corporate
COMMAND Accounts.
All shares purchased pursuant to these automatic purchase procedures will
begin earning dividends on the business day after the order is placed.
Prudential Securities will arrange for investment in shares of the Series at
4:30 P.M. on the day the order is placed and cause payment to be made for the
shares on the next business day. Prudential Securities will have the use of, and
retain the benefits of, free credit cash balances until monies are delivered to
the Trust. There are no minimum investment requirements for participants in the
COMMAND Account program.
Redemptions will be automatically effected by Prudential Securities to
satisfy debit balances in a Securities Account created by activity therein or
arising under the COMMAND Program, such as those incurred by the use of the
Visa(R) Gold Account, including Visa purchases, cash advances and Visa Account
checks. Each COMMAND program Securities Account will be automatically scanned
for debits monthly and each business day as of the close of business on that day
for all cash advances and check charges as incurred and, after application of
any free credit cash balances in the account to such debits, a sufficient number
of shares of the Series and, if necessary, shares of other COMMAND funds owned
by the COMMAND Program participant that you have not selected as your primary
fund or shares of a participant's money market funds managed by PIFM that are
not primary COMMAND funds will be redeemed as of that business day to satisfy
any
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15
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How to Buy, Sell and
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Exchange Shares of the Series
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remaining debits in the Securities Account. The single monthly debit for
Visa purchases will be made on the twenty-fifth day of each month, or the prior
business day if the twenty-fifth day falls on a weekend or holiday. Margin loans
will be utilized to satisfy debits remaining after the liquidation of all shares
of the Series in a Securities Account, and shares may not be purchased until all
debits, overdrafts and other requirements in the Securities Account are
satisfied. COMMAND Accounts participants will not be entitled to dividends
declared on the date of redemption.
For information on participation in the COMMAND Account program, you should
telephone (800) 222-4321.]
Step 2: Choose a Share Class
Individual investors can choose between Class A and Class Z shares of the
Series, although Class Z shares are available only to a limited group of
investors.
When choosing a share class, you should consider the following:
o The amount of your investment
o Whether you qualify to purchase Class Z shares
Share Class Comparison. Use this chart to help you compare the Series' two share
classes. The discussion following this chart will tell you whether you are
entitled to a reduction or waiver of any sales charges.
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Share Class Comparison Class A Class Z
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Minimum purchase amount(1) $1,000 None
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Minimum amount for subsequent purchases1 $ 100 None
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Maximum initial sales charge None None
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Contingent Deferred Sales Charge (CDSC) None None
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Annual distribution and service (12b-1) fees
(shown as a percentage of average net assets)(2) .125 of 1% None
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(1) The minimum investment requirements do not apply to certain retirement and
employee savings plans and custodial accounts for minors. The minimum
initial and subsequent investment for purchases made through the Automatic
Investment Plan is $50. For more information, see "Additional Shareholder
Services--Automatic Investment Plan."
(2) These distribution fees are paid from the Series' assets on a continuous
basis. Over time, the fees will increase the cost of your investment and
may cost you more than paying other types of sales charges. The service fee
for Class A shares is at an annual rate of up to .125 of 1%.
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16 U.S. Treasury Money Market Series [GRAPHIC] (800) 225-1852
<PAGE>
How to Buy, Sell and
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Exchange Shares of the Series
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Qualifying for Class Z Shares
Class Z shares of the Series can be purchased by any of the following:
o Pension, profit-sharing or certain other employee benefit plans
qualified under Section 401 of the Internal Revenue Code and deferred
compensation and annuity plans under Section 457 and 403(b)(7) of the
Internal Revenue Code--which we call Benefit Plans--and certain
nonqualified plans, provided the Benefit Plan -- in combination with
other plans sponsored by the same employer or group of related
employers -- has at least $50 million in defined contribution assets
o Participants in any fee-based programs or trust program sponsored by
Prudential or an affiliate which includes mutual funds as investment
options and the Series as an available option
o Certain participants in the MEDLEY Program (group variable annuity
contracts) sponsored by Prudential for whom Class Z shares of the
Prudential Mutual Funds are an available option
o Benefit Plans for which an affiliate of the Distributor provides
administrative or record keeping services and, as of September 20,
1996, were either Class Z shareholders of the Prudential Mutual Funds
or executed a letter of intent to purchase Class Z shares of
Prudential Mutual Funds
o The Prudential Securities Cash Balance Pension Plan, an
employee-defined benefit plan sponsored by Prudential Securities
o Current and former Directors/Trustees of the Prudential Mutual Funds
(including the Trust)
o Employees of Prudential and/or Prudential Securities who participate
in a Prudential-sponsored employee savings plan
o Prudential with an investment of $10 million or more
In connection with the sale of shares, the Manager, the Distributor or one
of their affiliates may pay brokers, financial advisers and other persons a
finder's fee for Class Z shares from their own resources based on a percentage
of the net asset value of shares sold or otherwise.
Step 3: Understanding the Price You'll Pay
Shares of a money market mutual fund, like the Series, are priced differently
than shares of common stock and other securities.
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How to Buy, Sell and
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Exchange Shares of the Series
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The price you pay for each share of the Series is based on the share value.
The share value of a mutual fund--known as the net asset value or NAV--is
determined by a simple calculation--it's the total value of the fund (assets
minus liabilities) divided by the total number of shares outstanding. In
determining NAV, the Series values its securities using the amortized cost
method. The Series seeks to maintain an NAV of $1.
We determine the NAV of our shares once each business day at 4:30 p.m. New
York time on days that the New York Stock Exchange is open for trading. We do
not determine NAV on days when we have not received any orders to purchase or
sell shares of the Series or when changes in the value of the Series' portfolio
do not materially affect the NAV.
What Price Will You Pay for Shares of the Series?
For Class A and Class Z shares, you will pay the NAV next determined after we
receive your order to purchase (remember, there are no up-front sales charges
for these share classes). Your broker may charge you a separate or additional
fee for purchases of shares.
Step 4: Additional Shareholder Services
As a Series shareholder, you can take advantage of the following services and
privileges:
Automatic Reinvestment. As we explained in the Series Distributions and Tax
Issues section, the Series pays out--or distributes--its net investment income
and any capital gains to all shareholders. For your convenience, we will
automatically reinvest your distributions in the Series at NAV. If you want your
distributions paid in cash, you can indicate this preference on your
application, notify your financial adviser, or notify the Transfer Agent in
writing (at the address below) not less than five full business days before the
date we determine who receives dividends. The mailing address of the Transfer
Agent is:
Prudential Mutual Fund Services LLC
Attn: Account Maintenance
P.O. Box 15015
New Brunswick, NJ 08906-5015
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18 U.S. Treasury Money Market Series [GRAPHIC] (800) 225-1852
<PAGE>
How to Buy, Sell and
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Exchange Shares of the Series
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Automatic Investment Plan. You can make regular purchases of the Series for as
little as $50 by having the money automatically withdrawn from your bank or
brokerage account at specified intervals.
Retirement Plan Services. Prudential offers a wide variety of retirement plans
for individuals and institutions, including large and small businesses. For
information on IRAs, including Roth IRAs or SEP-IRAs for a one-person business,
please contact your financial adviser. If you are interested in opening a 401(k)
or other company-sponsored retirement plan (SIMPLES, SEP plans, Keoghs,
403(b)(7) plans, pension and profit-sharing plans), your financial adviser will
help you determine which retirement plan best meets your needs. Complete
instructions about how to establish and maintain your plan and how to open
accounts for you and your employees will be included in the retirement plan kit
you receive in the mail.
Systematic Withdrawal Plan. A systematic withdrawal plan is available that will
provide you with monthly or quarterly checks.
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 LLC, PMFS or the Transfer Agent, Attention: Customer Service, P.O. Box
15005, New Brunswick, New Jersey 08906-5010, 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. Sub-accounts may be
identified by name and number within the master account name. The investment
minimums set forth above apply to the aggregate amounts invested by a group and
not to the amount credited to each sub-account.
Reports to Shareholders. Every year we will send you an annual report (along
with an updated prospectus) and a semi-annual report, which contain important
financial information about the Series. To reduce expenses, we will send one
annual shareholder report, one semi-annual shareholder report and one annual
prospectus per household, unless you instruct us or your broker otherwise.
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19
<PAGE>
How to Buy, Sell and
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Exchange Shares of the Series
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HOW TO SELL YOUR SHARES
You can sell your shares of the Series for cash (in the form of a check) at any
time, subject to certain restrictions.
When you sell shares of the Series--also known as redeeming shares--the
price you will receive will be the NAV next determined after the Transfer Agent,
the Distributor or your broker receives your order to sell. If your broker holds
your shares, he must receive your order to sell by 4:30 p.m. New York time to
process the sale on that day. Otherwise contact:
Prudential Mutual Fund Services LLC
Attention: Redemption Services
P.O. Box 15010
New Brunswick, NJ 08906-5010
Generally, we will pay you for the shares that you sold within seven days
after the Transfer Agent, the Distributor or your broker receive your sell
order. If you hold shares through a broker, payment will be credited to your
account. If you are selling shares you recently purchased with a check, we may
delay sending you the proceeds until your check clears, which can take up to 10
days from purchase date. You can avoid delay if you purchase shares by wire,
certified check or cashier's check. Your broker may charge you a separate or
additional fee for sales of shares.
Restrictions on Sales
There are certain times when you may not be able to sell shares of the
Series or when we may delay paying you the proceeds from a sale. This may
happen during unusual market conditions or emergencies when the Series can't
determine the value of its assets or sell its holdings. If you invest by check,
we will only process your redemptions after your check clears. For more
information, see the SAI, "Purchase, Redemption and Pricing of Trust
Shares--Sale of Shares."
If you are selling more than $50,000 of shares, you want the check sent to
someone or someplace that is not in our records or you are a business or a trust
and if you hold your shares directly with the Transfer Agent, you may have to
have the signature on your sell order guaranteed by a financial institution. For
more information, see the SAI, "Purchase, Redemption and Pricing of Trust
Shares--Sale of Shares--Signature Guarantee."
- --------------------------------------------------------------------------------
20 U.S. Treasury Money Market Series [GRAPHIC] (800) 225-1852
<PAGE>
How to Buy, Sell and
- --------------------------------------------------------------------------------
Exchange Shares of the Series
- --------------------------------------------------------------------------------
Redemption in Kind
If the sales of Series shares you make during any 90-day period reaches the
lesser of $250,000 or 1% of the value of the Series' net assets, we can then
give you securities from the Series' portfolio instead of cash. If you want to
sell the securities for cash, you would have to pay the costs charged by a
broker. For more information, see the SAI, "Purchase, Redemption and Pricing of
Trust Shares."
Small Accounts
If you make a sale that reduces your account value to less than $500, we may
sell the rest of your shares (without charging any CDSC) and close your account.
We would do this to minimize the Series expenses paid by other shareholders. We
will give you 60 days' notice, during which time you can purchase additional
shares to avoid this action. This involuntary sale does not apply to
shareholders who own their shares as part of a 401(k) plan, an IRA or some other
tax-deferred plan or account.
90-Day Repurchase Privilege
After you redeem your shares, you have a 90-day period during which you may
reinvest any of the redemption proceeds in shares of the same Series without
paying an initial sales charge. In order to take advantage of this privilege,
you must notify the Transfer Agent or your broker at the time of the repurchase.
See the SAI, "Purchase, Redemption and Pricing of Trust Shares--Sale of Shares."
Retirement Plans
To sell shares and receive a distribution from a retirement account, call your
broker or the Transfer Agent for a distribution request form. There are special
distribution and income tax withholding requirements for distributions from
retirement plans and you must submit a withholding form with your request to
avoid delay. If your retirement plan account is held for you by your employer or
plan trustee, you must arrange for the distribution request to be signed and
sent by the plan administrator or trustee. For additional information, see the
SAI.
- --------------------------------------------------------------------------------
21
<PAGE>
How to Buy, Sell and
- --------------------------------------------------------------------------------
Exchange Shares of the Series
- --------------------------------------------------------------------------------
Automatic Redemption for Autosweep
If you participate in the Autosweep program, your Series shares may be
automatically redeemed to cover any deficit in your Prudential Securities
account. The amount redeemed will be the nearest dollar amount necessary to
cover the deficit.
The amount of the redemption will be the lesser of the total value of
Series shares held in your Prudential Securities account or the deficit in your
Prudential Securities account. If you use this automatic redemption procedure
and want to pay for a securities transaction in your account other than through
this procedure, you must deposit cash in your securities account before the
settlement date. If you use this automatic redemption procedure and want to pay
any other deficit in your securities account other than through this procedure,
you must deposit cash in your securities account before you incur the deficit.
Redemptions are automatically made by Prudential Securities, to the nearest
dollar, on each day to satisfy deficits from securities transactions or to honor
your redemption requests. Your account will be automatically scanned for
deficits each day and, if there is insufficient cash in your account, we will
redeem an appropriate number of shares of the Series at the next determined NAV
to satisfy any remaining deficit. You are entitled to any dividends declared on
the redeemed shares through the day before the redemption is made. Dividends
declared on the redemption date will be retained by Prudential Securities, which
has advanced monies to satisfy deficits in your account.
Automatic Redemption for the Advantage Account
If you participate in the Advantage Account Program, your Series shares may be
automatically redeemed to cover any deficit in your securities account. The
amount redeemed will be the nearest dollar amount necessary to cover the
deficit.
The amount of the redemption will be the lesser of the total value of
Series shares held in your securities account or the deficit in your securities
account. A deficit in your Advantage Account may result from activity arising
under the program, such as debt balances incurred by the use of the Visa(R)
Account, including Visa purchases, cash advances and Visa Account checks. Your
account will be automatically scanned for deficits each day and, if there is
insufficient cash in your account, we will redeem an appropriate number of
shares of the Series to satisfy any remaining deficit. You are entitled to any
dividends declared on the redeemed shares through the day before the redemption
is made. Dividends declared on the redemption date will be retained by
Prudential Securities, which has advanced monies to satisfy deficits in your
account.
Redemptions are automatically made by Prudential Securities, to the nearest
dollar, on each day to satisfy deficits from securities transactions or to honor
your redemption requests.
HOW TO EXCHANGE YOUR SHARES
You can exchange your shares of the Series for shares of other series of the
Trust of the same class and certain other Prudential Mutual Funds--including
certain money market funds--if you satisfy the minimum investment requirements.
For example, you can exchange Class A shares of the Series for Class A shares of
another Prudential Mutual Fund, on the basis of the relative NAV plus the
applicable sales charge but you can't exchange Class A shares for Class B, Class
C or Class Z shares. We may change the terms of the exchange privilege after
giving you 60 days' notice.
If you hold shares through a broker, you must exchange shares through your
broker. Otherwise contact:
Prudential Mutual Fund Services LLC
Attn: Exchange Processing
P.O. Box 15010
New Brunswick, NJ 08906-5010
Frequent Trading
Frequent trading of Series shares in response to short-term fluctuations in the
market--also known as "market timing"--may make it very difficult to manage the
Series' investments. Also when market timing occurs, the Series may have to sell
portfolio securities to have the cash necessary to redeem the market timer's
shares.This can happen at a time when it is not advantageous to sell any
securities, so the Series' performance may be hurt. When large dollar amounts
are involved, market timing can also make it difficult to use long-term
investment strategies because we cannot predict how much cash the Series will
have to invest. When in our opinion such activity would have a disruptive effect
on portfolio management, the Series reserves the right to refuse purchase orders
and exchanges into the Series by any person, group or commonly controlled
accounts.The Series may notify a market timer of rejection of an exchange or
purchase order subsequent to the day the order is placed. If the Series allows a
market timer to trade Series shares, it may require the market timer to enter
into a written agreement to follow certain procedures and limitations.
- --------------------------------------------------------------------------------
22 U.S. Treasury Money Market Series [GRAPHIC] (800) 225-1852
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
The financial highlights will help you evaluate the Series' financial
performance. The total return in the chart represents the rate that a
shareholder earned on an investment in the Series, assuming reinvestment of all
dividends and other distributions. The information is for each share class for
the periods indicated.
Review this chart with the financial statements and report of independent
accountants, which appear in the annual report and the SAI and are available
upon request. Additional performance information is contained in the annual
report, which you can receive at no charge.
Class A Shares
The financial highlights for the five-year period ended November 30, 1998 were
audited by [ ], independent accountants, whose report was
unqualified.
<TABLE>
<CAPTION>
- --------------------------------------------
Class A Shares (fiscal years ended 11-30-98)
- ------------------------------------------------------------------------------------------------
Per Share Operating Performance 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of year $1.00 $1.00 $1.00 $1.00
Net investment income .47 .046 .050 .033
Dividends from net investment income (0.47) (.046) (.050) (.033)
Net asset value, end of year $1.00 $1.00 $1.00 $1.00
Total return(1) 4.80% 4.75% 5.08% 3.31%
<CAPTION>
- ------------------------------------------------------------------------------------------------
Ratios/Supplemental Data 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net assets, end of year (000) $432,784 $305,330 $339,334 $293,984
Average net assets (000) $402,634 $393,060 $345,369 $308,454
Ratios to average net assets:
Expenses, including distribution fees .65% .63% .62% .62%
Expenses, excluding distribution fees .52% .51% .50% .50%
Net investment income 4.66% 4.57% 5.01% 3.21%
- -------------------------------------------------------------------------------------------------
</TABLE>
(1) Total return assumes reinvestment of dividends and any other distributions.
It is calculated assuming shares are purchased on the first day and sold on
the last day of each period reported.
- --------------------------------------------------------------------------------
23
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
Class Z Shares
The financial highlights for the fiscal year period ended November 30, 1998 and
for the period from February 21, 1997 through November 30, 1997 were audited by
[ ], independent accountants, whose report was unqualified.
- --------------------------------------------
Class Z Shares (fiscal years ended 11-30-98)
- --------------------------------------------------------------------------------
Per Share Operating Performance 1998 1997(1)
- --------------------------------------------------------------------------------
Net asset value, beginning of period $1.000
Net investment income .039
Dividends from net investment income (.039)
Net asset value, end of period $1.000
Total return2 3.96%
- --------------------------------------------------------------------------------
Ratios/Supplemental Data 1998 1997(1)
- --------------------------------------------------------------------------------
Net assets, end of period (000) $205(4)
Average net assets (000) $197(4)
Ratio of average net assets:
Expenses .52%(3)
Net investment income 3.89%(3)
- --------------------------------------------------------------------------------
(1) Information shown is for the period from February 21, 1997 (when Class Z
shares were first offered) through November 30, 1997.
(2) Total return assumes reinvestment of dividends and any other distributions.
It is calculated assuming shares are purchased on the first day and sold on
the last day of each period reported. Total return for periods of less than
a full year is not annualized.
(3) Annualized.
(4) Figure is actual and not rounded to nearest thousand.
- --------------------------------------------------------------------------------
24 U.S. Treasury Money Market Series [GRAPHIC] (800) 225-1852
<PAGE>
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- --------------------------------------------------------------------------------
[This page has been left blank intentionally.]
- --------------------------------------------------------------------------------
25
<PAGE>
- --------------------------------------------------------------------------------
The Prudential Mutual Fund Family
- --------------------------------------------------------------------------------
Prudential offers a broad range of mutual funds designed to meet your individual
needs. For information about these funds, contact your financial adviser or call
us at (800) 225-1852. Read the prospectus carefully before you invest or send
money.
STOCK FUNDS GLOBAL FUNDS
Prudential Distressed Securities Global Stock Funds
Fund, Inc. Prudential Developing Markets Fund
Prudential Emerging Growth Fund, Inc. Prudential Developing Markets
Prudential Equity Fund, Inc. Equity Fund
Prudential Equity Income Fund Prudential Latin America Equity Fund
Prudential Index Series Fund Prudential Europe Growth Fund, Inc.
Prudential Small-Cap Index Fund Prudential Global Genesis Fund, Inc.
Prudential Stock Index Fund Prudential Index Series Fund
The Prudential Investment Prudential Europe Index Fund
Portfolios, Inc. Prudential Pacific Index Fund
Prudential Jennison Growth Fund Prudential Natural Resources
Prudential Jennison Growth & Fund, Inc.
Income Fund Prudential Pacific Growth Fund, Inc.
Prudential Mid-Cap Value Fund Prudential World Fund, Inc.
Prudential Real Estate Securities Fund Global Series
Prudential Small-Cap Quantum International Stock Series
Fund, Inc. Global Utility Fund, Inc.
Prudential Small Company Value
Fund, Inc. Global Bond Funds
Prudential Tax-Managed EquityFund Prudential Global Limited Maturity
Prudential 20/20 Focus Fund Fund, Inc.
Prudential Utility Fund, Inc. Limited Maturity Portfolio
Nicholas-Applegate Fund, Inc. Prudential Intermediate Global
Nicholas-Applegate Growth Income Fund, Inc.
Equity Fund Prudential International Bond
Fund, Inc.
Asset Allocation/Balanced Funds The Global Total Return Fund, Inc.
Prudential Balanced Fund
Prudential Diversified Funds
Conservative Growth Fund
Moderate Growth Fund
High Growth Fund
The Prudential Investment
Portfolios, Inc.
Prudential Active Balanced Fund
- --------------------------------------------------------------------------------
26 U.S. Treasury Money Market Series [GRAPHIC] (800) 225-1852
<PAGE>
- --------------------------------------------------------------------------------
The Prudential Mutual Fund Family
- --------------------------------------------------------------------------------
BOND FUNDS MONEY MARKET FUNDS
Taxable Bond Funds Taxable Money Market Funds
Prudential Diversified Bond Fund, Inc. Cash Accumulation Trust
Prudential Government Income Liquid Assets Fund
Fund, Inc. National Money Market Fund
Prudential Government Securities Trust Prudential Government Securities Trust
Short-Intermediate Term Series Money Market Series
Prudential High Yield Fund, Inc. U.S. Treasury Money Market Series
Prudential High Yield Total Return Prudential Special Money Market
Fund, Inc. Fund, Inc.
Prudential Index Series Fund Money Market Series
Prudential Bond Market Index Fund Prudential MoneyMart Assets, Inc.
Prudential Structured Maturity
Fund, Inc. Tax-Free Money Market Funds
Income Portfolio Prudential Tax-Free Money Fund, Inc.
Prudential California Municipal Fund
Tax-Exempt Bond Funds California Money Market Series
Prudential California Municipal Fund Prudential Municipal Series Fund
California Series Connecticut Money Market Series
California Income Series Massachusetts Money Market Series
Prudential Municipal Bond Fund New Jersey Money Market Series
High Income Series New York Money Market Series
Insured Series
Prudential Municipal Series Fund Command Funds
Florida Series Command Money Fund
Massachusetts Series Command Government Fund
New Jersey Series Command Tax-Free Fund
New York Series
North Carolina Series Institutional Money Market Funds
Ohio Series Prudential Institutional Liquidity
Pennsylvania Series Portfolio, Inc.
Prudential National Municipals Institutional Money Market Series
Fund, Inc.
- --------------------------------------------------------------------------------
27
<PAGE>
- --------------------------------------------------------------------------------
FOR MORE INFORMATION:
- --------------------------------------------------------------------------------
Please read this prospectus before you You can also obtain copies of Fund
invest in the Fund and keep it for documents from the Securities and
future reference. For information or Exchange Commission as follows:
shareholder questions contact:
By Mail:
Prudential Mutual Fund Services LLC Securities and Exchange Commission
P.O. Box 15005 Public Reference Section
New Brunswick, NJ 08906-5005 Washington, DC 20549-6009
(800) 225-1852 (The SEC charges a fee to copy
(732) 417-7555 documents.)
(if calling from outside the U.S.)
In Person:
- --------------------------------------- Public Reference Room in
Outside Brokers Should Contact: Washington, DC
Prudential Investment Management (For hours of operation, call
Services LLC 1(800) SEC-0330)
P.O. Box 15035
New Brunswick, NJ 08906-5035 Via the Internet:
(800) 778-8769 http://www.sec.gov
- ---------------------------------------
Visit Prudential's Web Site At: -------------------------------------
http://www.prudential.com CUSIP Numbers:
Class A: 744342106
- --------------------------------------- Class Z: 744342605
Additional information about the Fund
can be obtained without charge and can Investment Company Act File No:
be found in the following documents: 811-3264
Statement of Additional
Information (SAI)
(incorporated by reference into
this prospectus)
Annual Report
Semi-Annual Report
[LOGO] Printed on Recycled Paper
MF145A
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
FUND TYPE:
- ---------------------------------------
Government securities
INVESTMENT OBJECTIVE:
- ---------------------------------------
High level of income consistent
with providing reasonable
safety>>
Prudential
Government
Securities Trust
- --------------------------------------------------------------------------------
SHORT-INTERMEDIATE TERM SERIES
PROSPECTUS DATED APRIL , 1999
As with all mutual funds, the Securities and Exchange Commission has not
approved the Trust shares, nor has the SEC determined that this prospectus is
complete or accurate. It is a criminal offense to state otherwise.
[LOGO] Prudential
Investments
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
Table of Contents
- --------------------------------------------------------------------------------
1 Risk/Return Summary
1 Investment Objective and Principal Strategies
1 Principal Risks
2 Evaluating Performance
3 Fees and Expenses
5 How the Series Invests
5 Investment Objective and Policies
7 Other Investments
7 Derivative Strategies
8 Additional Strategies
10 Investment Risks
13 How the Series is Managed
13 Manager
13 Investment Adviser
13 Portfolio Manager
14 Distributor
14 Year 2000 Readiness Disclosure
16 Series Distributions and Tax Issues
16 Distributions
17 Tax Issues
18 If You Sell or Exchange Your Shares
19 How to Buy, Sell and Exchange Shares of the Series
19 How to Buy Shares
23 How to Sell Your Shares
25 How to Exchange Your Shares
27 Financial Highlights
27 Class A Shares
28 Class Z Shares
30 The Prudential Mutual Fund Family
For More Information (Back Cover)
- --------------------------------------------------------------------------------
Short-Intermediate Series [GRAPHIC] (800) 225-1852
<PAGE>
- --------------------------------------------------------------------------------
Risk/Return Summary
- --------------------------------------------------------------------------------
This section highlights key information about the Short-Intermediate Term
Series, which we refer to as "the Series." Additional information follows this
summary.
INVESTMENT OBJECTIVE AND PRINCIPAL STRATEGIES
Our investment objective is to achieve a high level of income consistent with
providing reasonable safety. To achieve this objective, we invest at least 65%
of the Series' total assets in U.S. Government securities, including U.S.
Treasury Bills, Notes, Bonds and other debt securities issued or guaranteed by
the U.S. Government, its agencies or instrumentalities. While we make every
effort to achieve our investment objective, we can't guarantee success.
PRINCIPAL RISKS
Although we try to invest wisely, all investments involve risk. The securities
in which the Series invests are generally subject to the risk that the
securities may lose value because interest rates change or there is a lack of
confidence in the borrower. In addition, certain securities may be subject to
the risk that the issuer may be unable to make principal and interest payments
when they are due. Certain other securities may be subject to prepayment risk,
which means that if they are prepaid, the Series may have to replace them with
lower yielding securities.
Some of our investment strategies involve additional risk. Like any mutual
fund, an investment in the Series could lose value, and you could lose money.
For more detailed information about the risks associated with the Series, see
"Investment Risks."
An investment in the Series is not a bank deposit and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency.
- --------------------------------------------------------------------------------
1
<PAGE>
- --------------------------------------------------------------------------------
Risk/Return Summary
- --------------------------------------------------------------------------------
EVALUATING PERFORMANCE
A number of factors--including risk--can affect how the Series performs. The
following bar chart and table show the Series' performance for each full
calendar year of operations for the last 10 years. They demonstrate the risk of
investing in the Series and how returns can change. Past performance does not
mean that the Series will achieve similar results in the future.
- ----------------------------------
Annual Returns Class A Shares(1)
- --------------------------------------------------------------------------------
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
- --------------------------------------------------------------------------------
[BAR CHART HERE]
- --------------------------------------------------------------------------------
BEST QUARTER: ?% (?nd quarter of 199?) WORST QUARTER: ?% (?rd quarter of 199?)
- --------------------------------------------------------------------------------
(1) The Series' year-to-date return as of [ ] was %.
- ------------------------------------------
Average Annual Returns (as of 12-31-98)(1)
- --------------------------------------------------------------------------------
1 YR 5 YRS 10 YRS SINCE INCEPTION
- --------------------------------------------------------------------------------
Class A Shares __% __% __% __% (since 9-22-82)
- --------------------------------------------------------------------------------
Class Z Shares __% n/a n/a __% (since 2-26-97)
- --------------------------------------------------------------------------------
Lipper Average(2) __% __% __% *
- --------------------------------------------------------------------------------
(1) The Series' returns are after deduction of expenses.
(2) The Lipper Average is based on the average return of all mutual funds in
the Lipper Short-Intermediate U.S. Government Fund category without
deducting any sales charges. These returns would be lower if they deducted
sales charges.
* Lipper returns since inception of each class are __% for Class A and __%
for Class Z shares. Source: Lipper, Inc.
- --------------------------------------------------------------------------------
2 Short-Intermediate Series [GRAPHIC] (800) 225-1852
<PAGE>
- --------------------------------------------------------------------------------
Risk/Return Summary
- --------------------------------------------------------------------------------
Fees and Expenses
This table shows the sales charges, fees and expenses for each share class of
the Series--Class A and Class Z. Each share class has different expenses, but
represents an investment in the same fund. Class Z shares are available only to
a limited group of investors. For more information about which share class may
be right for you, see "How to Buy, Sell and Exchange Shares of the Series."
- ----------------------------------------------------------
Shareholder Fees(1) (paid directly from your investment)
- --------------------------------------------------------------------------------
CLASS A CLASS Z
- --------------------------------------------------------------------------------
Maximum sales charge (load) imposed on
purchases (as a percentage of offering price) None None
- --------------------------------------------------------------------------------
Maximum deferred sales charge (load)
(as a percentage of the lower of original
price or sale proceeds) None None
- --------------------------------------------------------------------------------
Maximum sales charge (load) imposed
on reinvested dividends and other distributions None None
- --------------------------------------------------------------------------------
Redemption fees None None
- --------------------------------------------------------------------------------
Exchange fee None None
- ----------------------------------------------------------------
Annual Series Operating Expenses (deducted from Series assets)
- --------------------------------------------------------------------------------
CLASS A ClASS Z
- --------------------------------------------------------------------------------
Management fees .40% .40%
- --------------------------------------------------------------------------------
+ Distribution and service (12b-1) fees .25% None
- --------------------------------------------------------------------------------
+ Other expenses --% --%
- --------------------------------------------------------------------------------
= Total annual Series operating expenses % --%
- --------------------------------------------------------------------------------
(1) Your broker may charge you a separate or additional fee for purchases and
sales of shares.
- --------------------------------------------------------------------------------
3
<PAGE>
- --------------------------------------------------------------------------------
Risk/Return Summary
- --------------------------------------------------------------------------------
Example
This example will help you compare the fees and expenses of the Series' two
share classes and compare the cost of investing in the Series with the cost of
investing in other mutual funds.
The example assumes that you invest $10,000 in the Series for the time
periods indicated and then sell all of your shares at the end of those periods.
The example also assumes that your investment has a 5% return each year and that
the Series' operating expenses remain the same. Although your actual costs may
be higher or lower, based on these assumptions your costs would be:
- --------------------------------------------------------------------------------
1 YR 3 YRS 5 YRS 10 YRS
- --------------------------------------------------------------------------------
Class A shares $ __ $ __ $__ $__
- --------------------------------------------------------------------------------
Class Z shares $ __ $ __ $__ $__
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
4 Short-Intermediate Series [GRAPHIC] (800) 225-1852
<PAGE>
- --------------------------------------------------------------------------------
How the Series Invests
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES
The Series' investment objective is to achieve a high level of income consistent
with providing reasonable safety. While we make every effort to achieve our
objective, we can't guarantee success.
The Series invests at least 65% of its total assets in U.S. Government
securities. U.S. Government securities include U.S. Treasury Bills, Notes,
Bonds, and other debt securities issued by the U.S. Treasury and obligations,
including mortgage-backed securities, asset-backed securities and other
securities that are issued or guaranteed by the U.S. Government, its agencies or
instrumentalities. These guarantees do not extend to the yield or value of the
securities or the Series' shares. Not all U.S. Government securities are backed
by the full faith and credit of the United States. Some are supported only by
the credit of the issuing agency.
The Series may also invest up to 35% of its assets in the following
privately issued instruments: (1) fixed rate and adjustable rate mortgage-backed
securities, including collateralized mortgage obligations, multi-class
pass-through securities and stripped mortgage-backed securities, (2)
asset-backed securities, (3) corporate debt securities and (4) money market
instruments. These privately issued securities must be rated A or better by
Standard and Poor's Ratings Group (S&P) or Moody's Investors Service, Inc.
(Moody's) or comparably rated by any other Nationally Recognized Statistical
Rating Organization (NRSRO). Money market instruments must also have a
comparable short-term rating. A rating is an assessment of the likelihood of
timely payment of interest and principal by the issuer of the security. The
Series may also invest in unrated securities, if the Series' investment adviser
determines them to be of comparable quality.
Mortgage-backed securities are pass-through securities that directly or
indirectly represent an ownership interest in, or are payable from, fixed or
adjustable-rate mortgage loans generally secured by real property. There are
currently two basic types of mortgage-backed securities: (1) those issued or
guaranteed directly or indirectly, by the U.S. Government or one of its agencies
or instrumentalities, such as the Government National Mortgage Association
(GNMA), Federal National Mortgage Association (FNMA) and Federal Home Loan
Mortgage Corporation (FHLMC) and (2) those issued or guaranteed privately. These
securities are created by pooling mortgages together and selling undivided
interests in the pool. The payments on the underlying
- --------------------------------------------------------------------------------
5
<PAGE>
- --------------------------------------------------------------------------------
How the Series Invests
- --------------------------------------------------------------------------------
mortgages are generally "passed through" to the holder of the mortgage-backed
security in monthly payments. Private mortgage pass-through securities that are
not guaranteed by the U.S. Government, its agencies or instrumentalities,
generally have one or more types of credit enhancement to ensure timely receipt
of payments and to protect against default.
GNMA, FNMA and FHLMC mortgage pass-through securities and private mortgage
pass-through securities include collateralized mortgage obligations, multi-class
pass-through securities and stripped mortgage-backed securities. A
collateralized mortgage obligation (CMO) is a security backed by an underlying
portfolio of mortgages or mortgage-backed securities, which may be issued or
guaranteed by a bank or by the U.S. Government, its agencies or
instrumentalities. A multi-class pass-through security is an equity interest in
a trust composed of underlying 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 CMO or to make scheduled distributions on the
multi-class pass-through security. A stripped mortgage-backed security (MBS
strip) may be issued by the U.S. Government, its agencies or instrumentalities
or by private institutions. MBS strips take the two pieces of a debt security
(principal and interest) and break them apart. The resulting two securities may
be sold separately and may perform differently MBS strips are highly sensitive
to changes in prepayment and interest rates.
An asset-backed security is another type of pass-through instrument that
pays interest based upon the cash flow of an underlying pool of assets, such as
automobile loans and credit card receivables.
A corporation that wishes to raise cash may choose to issue a corporate
debt security. The corporation pays the investor a fixed or variable rate of
interest and must repay the amount borrowed at maturity.
Money market instruments include bank obligations, obligations of savings
institutions, fully insured certificates of deposit and commercial paper of a
comparable short-term rating.
For temporary defensive purposes, the Series may invest up to 100% of its
assets in cash, U.S. Government securities and high quality money market
instruments. Investing heavily in these securities limits our ability to achieve
a high level of income, but may help to preserve the Series' assets.
- --------------------------------------------------------------------------------
6 Short-Intermediate Series [GRAPHIC] (800) 225-1852
<PAGE>
- --------------------------------------------------------------------------------
How the Series Invests
- --------------------------------------------------------------------------------
It is currently anticipated that the Series will invest primarily in
securities with maturities ranging from 2 to 5 years, but depending on market
and changing economic conditions, the Series may invest in securities of any
maturity of 10 years or less or, for hedging purposes, in longer term
securities, including 30 year futures.
For more information, see "Investment Risks" and the Statement of
Additional Information, "Description of the Trust, Its Investments and Risks."
The Statement of Additional Information--which we refer to as the SAI--contains
additional information about the Trust. To obtain a copy, see the back cover
page of this prospectus.
The Series' investment objective is a fundamental policy that cannot be
changed without shareholder approval. The Board of Government Securities Trust
can change investment policies that are not fundamental.
OTHER INVESTMENTS
We may also make the following investments to increase the Series' returns or
protect its assets if market conditions warrant.
The Series may use repurchase agreements where a party agrees to sell a
security to the Fund and then repurchase it at an agreed-upon price at a stated
time. This creates a fixed return for the Series.
The Series may use reverse repurchase agreements, where the Series borrows
money on a temporary basis by selling a security with an obligation to
repurchase it at an agreed-upon price and time.
The Series may enter into dollar rolls in which the Series sells securities
to be delivered in the current month and repurchases substantially similar (same
type and coupon) securities to be delivered on a specified future date by the
same party. The Series is paid the difference between the current sales price
and the forward price for the future purchase as well as the interest earned on
the cash proceeds of the initial sale.
DERIVATIVE STRATEGIES
The Series may use a number of alternative investment strategies--including
derivatives--to try to improve its return or protect its assets, although we
cannot guarantee they will work or that the Series will not lose money.
Derivatives--such as futures contracts, options and options on futures--
- --------------------------------------------------------------------------------
7
<PAGE>
- --------------------------------------------------------------------------------
How the Series Invests
- --------------------------------------------------------------------------------
involve costs and can be volatile. A futures contract is an agreement to buy or
sell a set quantity of an underlying product at a future date, or to make or
receive a cash payment based on the value of a securities index. An option is
the right to buy or sell securities, or in the case of an option on a futures
contract, the right to buy or sell a futures contract in exchange for a premium.
With derivatives, the investment adviser tries to predict if the underlying
investment, whether a security, market index, currency, interest rate or some
other investment, will go up or down at some future date. We may use derivatives
to try to reduce risk or to increase return consistent with the Series' overall
investment objective. Any derivatives we may use may not match the Series'
underlying holdings. For more information about these strategies, see the SAI,
"Description of the Trust, Its Investments and Risks--Risks of Hedging and
Return Enhancement Strategies."
ADDITIONAL STRATEGIES
The Series may purchase money market obligations on a when-issued or
delayed-delivery basis. When the Series makes this type of purchase, the price
and interest rate are fixed at the time of purchase, but delivery and payment
for the obligations take place at a later time. The Series does not earn
interest income until the date the obligations are delivered.
The Series may enter into interest rate swap transactions. In a swap
transaction the Series and another party "trade" income streams. The swap is
done to preserve a return or spread on a particular investment or portion of a
portfolio or to protect against any increase in the price of securities the
Series anticipates purchasing at a later date.
The Series may also engage in active trading--that is, frequent trading of
its securities--in order to take advantage of new investment opportunities or
yield differentials. The Series will be more heavily involved in active trading
during periods of market volatility in order to preserve gains or limit losses.
There may be tax consequences, such as a possible increase in short-term capital
gains or losses when the Series sells a security without regard to how long it
has held the security. In addition, active trading may result in greater
transaction costs, which will reduce the Series' return.
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8 Short-Intermediate Series [GRAPHIC] (800) 225-1852
<PAGE>
- --------------------------------------------------------------------------------
How the Series Invests
- --------------------------------------------------------------------------------
The Series may purchase floating rate and variable rate securities. These
securities pay interest at rates that change periodically to reflect changes in
market interest rates. Because these securities adjust the interest they pay,
they may be beneficial when interest rates are rising because of the additional
return the Series will receive, and they may be detrimental when interest rates
are falling because of the reduction in interest payments to the Series.
The Series may also purchase U.S. dollar-denominated foreign debt
securities, which include securities that are issued by foreign governments and
corporations. Foreign government debt securities include securities issued by
quasi-governmental entities, governmental agencies and supranational entities.
The Series may make short sales, where we sell a security we have borrowed
because we expect the value of the security to drop, at which point we purchase
the security at the lower market price and return it to the lender. The Series'
use of short sales is subject to certain fundamental restrictions described in
the SAI.
The Series may borrow an amount equal to no more than 33 1/3 % of the value
of its total assets (calculated at the time of the borrowing) from banks for
temporary, extraordinary or emergency purposes, for the clearance of
transactions or for investment purposes. Borrowing for investment purposes is
generally known as leveraging. Leveraging exaggerates the effect of any increase
or decrease in the market value of the Series' portfolio.
The Series follows certain policies when it lends its securities to others
(the Series can lend up to 30% of the value of its total assets); and holds
illiquid securities (the Series may hold up to 15% of its net assets in
securities, including securities with legal or contractual restrictions, those
without a readily available market and repurchase agreements with maturities
longer than seven days). The Series is subject to certain investment
restrictions that are fundamental policies, which means they cannot be changed
without shareholder approval. For more information about these restrictions, see
the SAI.
- --------------------------------------------------------------------------------
9
<PAGE>
- --------------------------------------------------------------------------------
How the Series Invests
- --------------------------------------------------------------------------------
INVESTMENT RISKS
As noted, all investments involve risk, and investing in the Series is no
exception. This chart outlines the key risks and potential rewards of the
Series' principal investments. See too, "Description of the Trust, Its
Investments and Risks," in the SAI.
<TABLE>
<CAPTION>
- --------------------------
Investment Type
% of Series' Total Assets Risks Potential Rewards
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
U.S. Government o Credit risk--the risk that default o Regular interest income
Securities of an issuer would leave the Series
At least 65% with unpaid interest or principal o Generally more secure than stock
and other equity securities
o Market risk--the risk that bonds or
other debt instruments may lose
value in the market because
interest rates change or there is a
lack of confidence in a group of
borrower or an industry
o Not all U.S. Government securities
are insured or guaranteed by the
government--some are backed by the
issuing agency
- ------------------------------------------------------------------------------------------------------------------------------------
Fixed and o Prepayment risk--the risk that o Regular interest income
Adjustable Rate the underlying mortgage or
Mortgage Backed other debt may be prepaid o Pass-through instruments
Securities and Asset- partially or completely, provide greater
Backed Securities generally during periods of diversification than
Percentage varies falling interest rates, which direct ownership of loans
could adversely affect yield
to maturity and require the o Certain mortgage-backed
Series to reinvest in lower securities may benefit
yielding securities, from security interest in
Adjustable rate real estate collateral
mortgage-backed securities
generally have higher rates of
prepayments
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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10 Short-Intermediate Series [GRAPHIC] (800) 225-1852
<PAGE>
- --------------------------------------------------------------------------------
How the Series Invests
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ---------------------------
Investment Type
% of Series' Total Assets Risks Potential Rewards
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Fixed and o Credit risk--risk that
Adjustable Rate the underlying mortgages
Mortgage Backed or receivables will not
Securities (cont'd) be paid by debtors or by
credit insurers or
guarantors with respect
to such instruments. Some
private mortgage and
asset-backed securities
are unsecured or secured
by lower rated insurers
or guarantors, and thus
may involve greater risk.
- ------------------------------------------------------------------------------------------------------------------------------------
Corporate o Credit risk o Regular interest income
debt obligations
Up to 35% under o Market risk o Generally more secure than stock
normal conditions and other equity securities
- ------------------------------------------------------------------------------------------------------------------------------------
Derivatives o Derivatives such as futures, and o The Series could make money and
Percentage varies options may not fully offset the protect against losses if the
underlying positions and this could investment analysis proves correct
result in losses to the Fund that
would not have otherwise occurred o Derivatives that involve leverage
could generate substantial gains at
o Derivatives used for risk low cost
management may not have the
intended effects and may result in o One way to manage the Series'
losses or missed opportunities risk/return balance by locking in
the value of an investment ahead of
o The counterparty to a derivatives time
contract could default
o Certain types of derivatives
involve costs to the Series which
can reduce returns
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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11
<PAGE>
- --------------------------------------------------------------------------------
How the Series Invests
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ---------------------------
Investment Type (cont'd)
% of Series' Total Assets Risks Potential Rewards
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
When-issued and o Use of such instruments and
delayed delivery strategies may magnify underlying
securities, reverse investment losses
repurchase agreements
and dollar rolls and o Investment costs may exceed
short sales potential underlying investment
Percentage varies gains
- ------------------------------------------------------------------------------------------------------------------------------------
Illiquid securities o May be difficult to value precisely
Up to 15% of net assets
o May be difficult to sell at the
time and price desired
- ------------------------------------------------------------------------------------------------------------------------------------
Money Market o Credit risk
Instruments
Up to 100% on a o Market risk
temporary basis
o Limited potential for capital
appreciation
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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12 Short-Intermediate Series [GRAPHIC] (800) 225-1852
<PAGE>
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How the Series is Managed
- --------------------------------------------------------------------------------
MANAGER
Prudential Investments Fund Management LLC (PIFM)
Gateway Center Three, 100 Mulberry Street
Newark, NJ 07102-4077
Under a management agreement with Government Securities Trust (the Trust),
PIFM manages the Series' investment operations and administers its business
affairs. For the fiscal year ended November 30, 1998, the Series paid PIFM
management fees of .40% of the Series' average net assets.
As of December 30, 1998, PIFM served as the Manager to all 46 of the
Prudential Mutual Funds, and as Manager or administrator to 22 closed-end
investment companies, with aggregate assets of approximately $70.5 billion.
INVESTMENT ADVISER
The Prudential Investment Corporation, called Prudential Investments, is the
Series' investment adviser. Its address is Prudential Plaza, 751 Broad Street,
Newark, NJ 07102. PIFM has responsibility for all investment advisory services,
supervises Prudential Investments and reimburses Prudential Investments for its
reasonable costs and expenses.
PORTFOLIO MANAGER
The Series is co-managed by Barbara L. Kenworthy and Robert N. Felice, CFA.
Barbara Kenworthy, a Managing Director of Prudential Investments, has
managed the Series since May 1995. Before joining Prudential in 1994, she served
as president and portfolio manager for several Dreyfus fixed-income funds. She
earned a B.A. from Wilson College and an M.B.A. from New York University.
Barbara has over 30 years of investment experience and is a member of the
Treasury Borrowing Advisory Committee of the Public Securities Association.
Robert Felice, a Vice President of Prudential Investments, has co-managed
the Series since September 1998. Prior to this appointment, he spent 10 years as
lead portfolio manager of many of Prudential's money market funds. He earned a
B.S. from Villanova and an M.B.A. from New York University. He was awarded the
Chartered Financial Analyst (CFA) designation.
- --------------------------------------------------------------------------------
13
<PAGE>
- --------------------------------------------------------------------------------
How the Series is Managed
- --------------------------------------------------------------------------------
Rob will be responsible for the day-to-day management of the Series'
portfolio under the supervision of Barbara who remains responsible for its
overall portfolio strategy. Barbara conducts extensive analysis of U.S. and
overseas markets to identify trends in interest rates, supply and demand and
economic growth while. Rob will then select the sectors, maturities and
individual bonds be believes provide the best value under these conditions.
DISTRIBUTOR
Prudential Investment Management Services LLC (PIMS) distributes the Series'
shares under a Distribution Agreement with the Series. The Series has a
Distribution and Service Plan under Rule 12b-1 under the Investment Company Act
for Class A shares. Under the Plan and Distribution Agreement, PIMS pays the
expenses of distributing the Series' Class A and Class Z shares and provides
certain shareholder support services. The Fund pays distribution and other fees
to PIMS as compensation for its services for Class A shares, but not for Class Z
shares. These fees--known as 12b-1 fees--are shown in the "Fees and Expenses"
table.
YEAR 2000 READINESS DISCLOSURE
The services provided to the Series and the shareholders by the Manager, the
Distributor, the Transfer Agent and the Custodian depend on the smooth
functioning of their computer systems and those of outside service providers.
Many computer software systems in use today cannot distinguish the year 2000
from the year 1900 because of the way dates are encoded and calculated. Such
event could have a negative impact on handling securities trades, payments of
interest and dividends, pricing and account services. The Manager, the
Distributor, the Transfer Agent and the Custodian have advised the Series that
they have been actively working on necessary changes to their computer systems
to prepare for the year 2000. The Series and its Directors receive and have
received since early 1998 satisfactory quarterly reports from the principal
service providers as to their preparations for year 2000 readiness, although
there can be no assurance that the service providers (or other securities market
participants) will successfully complete the necessary changes in a timely
manner or that there will be no adverse impact on the Series. Moreover, the
Series at this time has not considered retaining alternative service providers
or directly undertaken efforts
- --------------------------------------------------------------------------------
14 Short-Intermediate Series [GRAPHIC] (800) 225-1852
<PAGE>
- --------------------------------------------------------------------------------
How the Series is Managed
- --------------------------------------------------------------------------------
to achieve year 2000 readiness, the latter of which would involve substantial
expenses without an assurance of success.
Additionally, issuers of securities generally as well as those purchased by
the Series may confront year 2000 compliance issues which, if material and not
resolved, could have an adverse impact on securities markets and/or a specific
issuer's performance and result in a decline in the value of the securities held
by the Fund.
- --------------------------------------------------------------------------------
15
<PAGE>
- --------------------------------------------------------------------------------
Series Distributions and Tax Issues
- --------------------------------------------------------------------------------
Investors who buy shares of the Series should be aware of some important income
tax issues. For example, the Series distributes dividends and capital gains, if
any, to shareholders. These distributions are subject to federal income taxes,
unless you hold your shares in a 401(k) plan, an Individual Retirement Account
(IRA), or some other qualified tax-deferred plan or account.
The following briefly discusses some of the important tax issues you should
be aware of, but is not meant to be tax advice. For tax advice, please speak
with your tax adviser.
DISTRIBUTIONS
The Series pays dividends out of any net investment income plus short-term
capital gains to shareholders every month. For example, if the Series owns a
U.S. Government bond and the bond pays interest, the Series will pay out a
portion of this interest as a dividend to its shareholders, assuming the Series'
income is more than its costs and expenses. The dividends you receive from the
Series will be taxed as ordinary income, whether or not they are reinvested in
the Series.
The Series also distributes long-term capital gains to
shareholders--typically once a year--which are generated when the Series sells
assets that it held for more than 12 months, for a profit. For an individual,
the maximum long-term capital gains rate is 20%.
For your convenience, dividends and distributions of capital gains are
automatically reinvested in the Series. If you ask us to pay the distributions
in cash, we will send you a check instead of purchasing more shares of the
Series. Otherwise, if your account is with a broker, you will receive a credit
to your account. Either way, the distributions are subject to taxes, unless your
shares are held in a qualified tax-deferred plan or account. For more
information about automatic reinvestment and other shareholder services, see
"Step 4: Additional Shareholder Services" in the next section.
As of November 30, 1998, the Series had a capital loss for federal income
tax purposes of approximately [ ]. Accordingly, no capital gains distribution is
expected to be paid to shareholders until net gains have been realized in excess
of such carryforward.
- --------------------------------------------------------------------------------
16 Short-Intermediate Series [GRAPHIC] (800) 225-1852
<PAGE>
- --------------------------------------------------------------------------------
Series Distributions and Tax Issues
- --------------------------------------------------------------------------------
TAX ISSUES
Form 1099
During the tax season every year, you will receive a Form 1099, which reports
the amount of dividends and capital gains we distributed to you during the prior
year. If you own shares of the Series as part of a qualified tax-deferred plan
or account, your taxes are deferred, so you will not receive a Form 1099.
However, you will receive a Form 1099 when you take any distributions from your
qualified tax-deferred plan or account.
Series distributions are generally taxable to you in the year they are
received, except when we declare certain dividends in December of a calendar
year, and actually pay them in January of the following year. In such cases, the
dividends are treated as if they were paid on December 31 of the prior year.
Withholding Taxes
If federal law requires you to provide the Series with your tax identification
number and certifications as to your tax status, and you fail to do this, we
will withhold and pay to the U.S. Treasury 31% of your distributions. If you are
subject to backup withholding, we will withhold and pay to the U.S. Treasury 31%
of your distributions. Dividends of net investment income and short-term capital
gains paid to a nonresident foreign shareholder generally will be subject to a
U.S. withholding tax of 30%. This rate may be lower, depending on any tax treaty
the U.S. may have with the shareholder's country.
Qualified Retirement Plans
Retirement plans and accounts allow you to defer paying taxes on investment
income and capital gains. Contributions to these plans may also be tax
deductible, although distributions from these plans generally are taxable. In
the case of Roth IRA accounts, contributions are not tax deductible, but
distributions from the plan may be tax-free. Please contact your financial
adviser for information on a variety of Prudential Mutual Funds that are
suitable for retirement plans offered by Prudential.
- --------------------------------------------------------------------------------
17
<PAGE>
- --------------------------------------------------------------------------------
Series Distributions and Tax Issues
- --------------------------------------------------------------------------------
IF YOU SELL OR EXCHANGE YOUR SHARES
If you sell any shares of the Series for a profit, you have realized a capital
gain, which is subject to tax, unless you hold shares in a qualified
tax-deferred plan or account. For individuals, the maximum capital gains tax
rate is 20% for shares held for more than twelve months. If you sell shares of
the Series for a loss, you may have a capital loss, which you may use to offset
certain capital gains you have.
- -----------------------------------------
Receipts [GRAPHIC] Capital Gain
from (taxes owed)
Sale
OR
Capital Loss
(offset against gain)
- -----------------------------------------
Exchanging your shares of the Series for the shares of another Prudential
Mutual Fund is considered a sale for tax purposes. In other words, it's a
"taxable event." Therefore, if the shares you exchanged have increased in value
since you purchased them, you have capital gains, which are subject to the taxes
described above.
Any gain or loss you may have from selling or exchanging Series shares will
not be be reported on the Form 1099. Therefore, unless you hold your shares in a
qualified tax-deferred plan or account, you or your financial adviser should
keep track of the dates on which you buy and sell -- or exchange -- Series
shares, as well as the amount of any gain or loss on each transaction. For tax
advice, please see your tax adviser.
- --------------------------------------------------------------------------------
18 Short-Intermediate Series [GRAPHIC] (800) 225-1852
<PAGE>
How to Buy, Sell and Exchange
- --------------------------------------------------------------------------------
Shares of the Series
- --------------------------------------------------------------------------------
HOW TO BUY SHARES
Step 1: Open an Account
If you don't have an account with us or a securities firm that is permitted to
buy or sell shares of the Fund for you, call Prudential Mutual Fund Services LLC
(PMFS) at (800) 225-1852 or contact:
Prudential Mutual Fund Services LLC
Attn: Investment Services
P.O. Box 15020
New Brunswick, NJ 08906-5020
To purchase by wire, call the number above to obtain an application. After
PMFS receives your completed application, completion, you will receive an
account number. For additional information about purchasing shares of the
Series, see the back cover page of this prospectus. We have the right to reject
any purchase order (including an exchange into the Series) or suspend or modify
the Series' sale of its shares.
Step 2: Choose a Share Class
Individual investors can choose between Class A and Class Z shares of the
Series, although Class Z shares are available only to a limited group of
investors.
When choosing a share class, you should consider the following:
o The amount of your investment
o Whether you qualify to purchase Class Z shares
- --------------------------------------------------------------------------------
19
<PAGE>
How to Buy, Sell and Exchange
- --------------------------------------------------------------------------------
Shares of the Series
- --------------------------------------------------------------------------------
Share Class Comparison. Use this chart to help you compare the Series' two share
classes. The discussion following this chart will tell you whether you are
entitled to a reduction or waiver of any sales charges.
- --------------------------------------------------------------------------------
Share Class Comparison Class A Class Z
- --------------------------------------------------------------------------------
Minimum purchase amount(1) $1,000 None
- --------------------------------------------------------------------------------
Minimum amount for subsequent purchases(1) $ 100 None
- --------------------------------------------------------------------------------
Maximum initial sales charge None None
- --------------------------------------------------------------------------------
Contingent Deferred Sales Charge (CDSC) None None
- --------------------------------------------------------------------------------
Annual distribution and service (12b-1) fees
(shown as a percentage of average net assets)(2) (.25 of 1%) None
- --------------------------------------------------------------------------------
(1) The minimum investment requirements do not apply to certain retirement and
employee savings plans and custodial accounts for minors. The minimum
initial and subsequent investment for purchases made through the Automatic
Investment Plan is $50. For more information, see "Additional Shareholder
Services--Automatic Investment Plan."
(2) These distribution fees are paid from the Series' assets on a continuous
basis. Over time, the fees will increase the cost of your investment and
may cost you more than paying other types of sales charges. The service fee
for Class A shares is .25 of 1%. The distribution fee for Class A shares is
limited to .30 of 1% (including the .25 of 1% service fee).
Qualifying for Class Z Shares
Class Z shares of the Series can be purchased by any of the following:
o Pension, profit-sharing or other employee benefit plans qualified
under Section 401 of the Internal Revenue Code and deferred
compensation and annuity plans under Sections 457 and 403(b)(7) of the
Internal Revenue Code--which we call Benefit Plans--and certain
nonqualified plans, provided the Benefit Plan--in combination with
other plans sponsored by the same employer or group of related
employers--has at least $50 million in defined contribution assets
o Participants in any fee-based programs or trust program sponsored by
Prudential or an affiliate which includes mutual funds as investment
options and the Fund as an available option
o Certain participants in the MEDLEY Program (group variable annuity
contracts) sponsored by Prudential for whom Class Z shares of the
Prudential Mutual Funds are an available option
o Benefit Plans for which an affiliate of the Distributor provides
administrative or recording keeping services and as of September 20,
1996 were either Class Z shareholders of the Prudential Mutual Funds
or executed a letter of intent to purchase Class Z shares of the
Prudential Mutual Funds
- --------------------------------------------------------------------------------
20 Short-Intermediate Series [GRAPHIC] (800) 225-1852
<PAGE>
How to Buy, Sell and Exchange
- --------------------------------------------------------------------------------
Shares of the Series
- --------------------------------------------------------------------------------
o The Prudential Securities Cash Balance Pension Plan, an employee
defined benefit plan sponsored by Prudential Securities
o Current and former Directors/Trustees of the Prudential Mutual Funds
(including the Series)
o Employees of Prudential and/or Prudential Securities who participate
in a Prudential-sponsored employee savings plan
o Prudential with an investment of $10 million or more
In connection with the sale of shares, the Manager, the Distributor or one
of their affiliates may pay brokers, financial advisers and other persons a
finder's fee for Class Z shares from their own resources based on a percentage
of the net asset value of shares sold or otherwise.
Step 3: Understanding the Price You'll Pay
The price you pay for each share of the Series is based on the share value. The
share value of a mutual fund--known as the net asset value or NAV per share--is
determined by a simple calculation--it's the total value of the fund (assets
minus liabilities) divided by the total number of shares outstanding. For
example, if the value of the investments held by Fund XYZ (minus its
liabilities) is $1,000 and there are 100 shares of Fund XYZ owned by
shareholders, the price of one share of the fund--or the NAV--is $10 ($1,000
divided by 100). Portfolio securities are valued based upon market quotations
or, if not readily available, at fair value as determined in good faith under
procedures established by the Board of Government Securities Trust. Most
national newspapers report the NAVs of most mutual funds, which allows investors
to know the price of mutual funds daily.
We determine the NAV of our shares once each business day at 4:15 p.m. New
York Time on days that the New York Stock Exchange is open for trading. We do
not determine NAV on days when we have not received any orders to purchase or
sell shares of the Series or when changes in the value of the Series' portfolio
do not materially affect the NAV.
- --------------------------------------------------------------------------------
Mutual Fund Shares
The NAV of mutual fund shares changes every day because the value of a fund's
portfolio changes constantly. For example, if Fund XYZ holds ACME Corp. bonds in
its portfolio and the price of ACME bonds goes up, while the value of the fund's
other holdings remains the same and expenses don't change, the NAV of Fund XYZ
will increase.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
21
<PAGE>
How to Buy, Sell and Exchange
- --------------------------------------------------------------------------------
Shares of the Series
- --------------------------------------------------------------------------------
What Price Will You Pay for Shares of the Series?
For Class A and Class Z shares, you will pay the NAV next determined after we
receive your order to purchase (remember, there are no up-front sales charges
for these share classes). Your broker may charge you a separate or additional
fee for purchases of shares.
Step 4: Additional Shareholder Services
As a Series shareholder, you can take advantage of the following services and
privileges:
Automatic Reinvestment. As we explained in the Series Distributions and Tax
Issues section, the Series pays out--or distributes--its net investment income
and any capital gains to all shareholders. For your convenience, we will
automatically reinvest your distributions in the Series at NAV. If you want your
distributions paid in cash, you can indicate this preference on your
application, or notify your broker, or notify the Transfer Agent in writing (at
the address below) not less than five full business days before the date we
determine who receives dividends. The mailing address of the Transfer Agent is:
Prudential Mutual Fund Services LLC
Attn: Redemption Services
P.O. Box 15010
New Brunswick, NJ 08906-5010
Automatic Investment Plan. You can make regular purchases of the Series for as
little as $50 by having the money automatically withdrawn from your bank or
brokerage account at specified intervals.
Retirement Plan Services. Prudential offers a wide variety of retirement plans
for individuals and institutions, including large and small businesses. For
information on IRAs, including Roth IRAs or SEP-IRAs for a one-person business,
please contact your financial adviser. If you are interested in opening a 401(k)
or other company-sponsored retirement plan (SIMPLES, SEP plans, Keoghs,
403(b)(7) plans, pension and profit-sharing plans), your financial adviser will
help you determine which retirement plan best meets your needs. Complete
instructions about how to establish and maintain your plan
- --------------------------------------------------------------------------------
22 Short-Intermediate Series [GRAPHIC] (800) 225-1852
<PAGE>
How to Buy, Sell and Exchange
- --------------------------------------------------------------------------------
Shares of the Series
- --------------------------------------------------------------------------------
and how to open accounts for you and your employees will be included in the
retirement plan kit you receive in the mail.
The PruTector Program. Optional group term life insurance--which protects the
value of your Prudential Mutual Fund investment for your beneficiaries against
market downturns--is available to investors who purchase their shares through
Prudential. This insurance is subject to various restrictions and charges and is
not available in all states.
Systematic Withdrawal Plan. A systematic withdrawal plan is available that will
provide you with monthly or quarterly checks.
Reports to Shareholders. Every year we will send you an annual report (along
with an updated prospectus) and a semi-annual report, which contain important
financial information about the Series. To reduce Series expenses we will send
one annual shareholder report, one semi-annual shareholder report and one annual
prospectus per household, unless you instruct us or your financial adviser
otherwise.
How to Sell Your Shares
You can sell your shares of the Series for cash (in the form of a check) at any
time, subject to certain restrictions.
When you sell shares of the Series--also known as redeeming shares--the
price you will receive will be the NAV next determined after the Transfer Agent,
the Distributor or your broker receives your order to sell. If your broker holds
your shares, he must receive your order to sell by 4:15 p.m. New York time to
process the sale on that day. Otherwise, contact:
Prudential Mutual Fund Services LLC
Attn: Redemption Services
P.O. Box 15010
New Brunswick, NJ 08906-5010
Generally, we will pay you for the shares that you sold within seven days
after the Transfer Agent, the Distributor or your broker receives your sell
order. If you hold shares through a broker, payment will be credited to your
account. If you are selling shares you recently purchased with a check, we
- --------------------------------------------------------------------------------
23
<PAGE>
How to Buy, Sell and Exchange
- --------------------------------------------------------------------------------
Shares of the Series
- --------------------------------------------------------------------------------
may delay sending you the proceeds until your check clears, which can take up to
10 days from purchase date. You can avoid delay if you purchase shares by wire,
certified check or cashier's check. Your broker may charge you a separate or
additional fee for sales of shares.
Restrictions on Sales
There are certain times when you may not be able to sell shares of the Series or
when we may delay paying you the proceeds from a sale. This may happen during
unusual market conditions or emergencies when the Series can't determine the
value of its assets or sell its holdings. For more information, see the SAI,
"Purchase, Redemption and Pricing of Trust Shares--Sale of Shares."
If you are selling more than $50,000 of shares, you want the check sent to
someone or someplace that is not in our records or you are a business or a trust
and if you hold shares directly with the Transfer Agent, you may have to have
the signature on your sell order guaranteed by a financial institution. For more
information, see the SAI, "Purchase,Redemption and Pricing of Trust Shares--Sale
of Shares--Signature Guarantee."
Redemption in Kind
If the sales of Series shares you make during any 90-day period reaches the
lesser of $250,000 or 1% of the value of the Series' net assets, we can then
give you securities from the Series' portfolio instead of cash. If you want to
sell the securities for cash, you would have to pay the costs charged by a
broker.
Small Accounts
If you make a sale that reduces your account value to less than $500, we may
sell the rest of your shares and close your account. We would do this to
minimize the Series' expenses paid by other shareholders. We will give you 60
days' notice, during which time you can purchase additional shares to avoid this
action. This involuntary sale does not apply to shareholders who own their
shares as part of a 401(k) plan, an IRA or some other tax-deferred plan or
account.
90-Day Repurchase Privilege
After you redeem your shares, you have a 90-day period during which you may
reinvest any of the redemption proceeds in shares of the same Series
- --------------------------------------------------------------------------------
24 Short-Intermediate Series [GRAPHIC] (800) 225-1852
<PAGE>
How to Buy, Sell and Exchange
- --------------------------------------------------------------------------------
Shares of the Series
- --------------------------------------------------------------------------------
without paying an initial sales charge. In order to take advantage of this
privilege, you must notify the Transfer Agent or your broker at the time of the
repurchase. See the SAI, "Purchase, Redemption and Pricing of Trust Shares--Sale
of Shares."
Retirement Plans
To sell shares and receive a distribution from a retirement account, call your
broker or the Transfer Agent for a distribution request form. There are special
distribution and income tax withholding requirements for distributions from
retirement plans and you must submit a withholding form with your request to
avoid delay. If your retirement plan account is held for you by your employer or
plan trustee, you must arrange for the distribution request to be signed and
sent by the plan administrator or trustee. For additional information, see the
SAI.
HOW TO EXCHANGE YOUR SHARES
You can exchange your shares of the Series for shares of other series of the
Trust of the same class and certain other Prudential Mutual Funds--including
certain money market funds--if you satisfy the minimum investment requirements.
For example, you can exchange Class A shares of the Series for Class A shares of
another Prudential Mutual Fund, on the basis of the relative NAV plus the
applicable sales charge, but you can't exchange Class A shares for Class B,
Class C or Class Z shares. We may change the terms of the exchange privilege
after giving you 60 days' notice.
If you hold shares through a broker, you must exchange shares through your
broker. Otherwise contact:
Prudential Mutual Fund Services LLC
Attn: Exchange Processing
P.O. Box 15010
New Brunswick, NJ 08906-5010
Remember as we explained in the section entitled "If You Sell or Exchange
Your Shares," exchanging shares is considered a sale for tax purposes.
Therefore, if the shares you exchange are worth more than you paid for them, you
may have to pay capital gains tax. For additional information about exchanging
shares, see the SAI, "Purchase, Redemption and Pricing of Fund Shares--Exchange
Privilege."
- --------------------------------------------------------------------------------
25
<PAGE>
How to Buy, Sell and Exchange
- --------------------------------------------------------------------------------
Shares of the Series
- --------------------------------------------------------------------------------
Frequent Trading
Frequent trading of Series shares in response to short-term fluctuations in the
market--also known as "market timing"--may make it very difficult to manage the
Series' investments. Also when market timing occurs, the Series may have to sell
portfolio securities to have the cash necessary to redeem the market timer's
shares. This can happen at a time when it is not advantageous to sell any
securities, so the Series' performance may be hurt. When large dollar amounts
are involved, market timing can also make it difficult to use long-term
investment strategies because we cannot predict how much cash the Series will
have to invest. When in our opinion such activity would have a disruptive effect
on portfolio management, the Series reserves the right to refuse purchase orders
and exchanges into the Series by any person, group or commonly controlled
accounts. The Series may notify a market timer of rejection of an exchange or
purchase order subsequent to the day the order is placed. If the Series allows a
market timer to trade Series shares, it may require the market timer to enter
into a written agreement to follow certain proceedings and limitations.
- --------------------------------------------------------------------------------
26 Short-Intermediate Series [GRAPHIC] (800) 225-1852
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
The financial highlights will help you evaluate the Series' financial
performance. The total return in the chart represents the rate that a
shareholder earned on an investment in the Series, assuming reinvestment of all
dividends and other distributions. The information is for each share class of
the Series for the periods indicated.
Review this chart with the financial statements and report of independent
accountants, which appear in the annual report and the SAI. Additional
performance information is contained in the annual report, which you can receive
at no charge.
Class A Shares
The financial highlights for the five-year period ended November 30, 1998 were
audited by [ ], independent accountants, whose report was
unqualified.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
Class A Shares (fiscal years ended 11-30-98)
- ------------------------------------------------------------------------------------------------------------------------
Per Share Operating Performance 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 9.70 $ 9.74 $ 9.17 $ 10.06
Income from investment operations:
Net investment income 0.56 .51 .56 .64
Net realized and unrealized gain (loss) on
investment transactions -- (.01) .55 (.89)
Total from investment operations .56 .50 1.11 (.25)
- ------------------------------------------------------------------------------------------------------------------------
Less distributions:
Dividends from net investment income (.52) (.54) (.54) (.52)
Tax return of capital distribution -- -- -- (.12)
Total distributions (.52) (.54) (.54) (.64)
Net asset value, end of period $ 9.74 $ 9.70 $ 9.74 $ 9.17
Total Return(1) 5.96% 5.34% 12.37% (2.58)%
- ------------------------------------------------------------------------------------------------------------------------
Ratios/Supplemental Data 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (000) $149,162 $185,235 $212,996 $241,980
Average net assets (000) $166,651 $186,567 $209,521 $307,382
Ratio to average net assets:
Expenses, including distribution fees .97% 1.01% .95% .84%
Expenses, excluding distribution fees .77% .79% .75% .63%
Net investment income 5.76% 5.99% 5.82% 5.48%
Portfolio turnover rate 210% 132% 217% 431%
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Total return assumes reinvestment of dividends and any other distributions.
It1998 1997 1996 1995 1994 is calculated assuming shares are purchased on
the first day and sold on the last day of each period reported.
- --------------------------------------------------------------------------------
27
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
Class Z Shares
The financial highlights for the fiscal year period ended November 30, 1998
and for the period from February 26, 1997 through November 30, 1997 were audited
by [ ], independent accountants, whose report was unqualified.
- ---------------------------------------------
Class Z Shares (fiscal year ended 11-30-98)
- --------------------------------------------------------------------------------
Per Share Operating Performance 1998 1997(1)
- --------------------------------------------------------------------------------
Net asset value, beginning of period $9.64
Income from investment operations
Net investment income 0.47
Net realized and unrealized gain (loss) on investment transactions 0.07
Total from investment operations 0.54
- --------------------------------------------------------------------------------
Less distributions
Dividends from net investment income (0.41)
Total distributions (0.41)
Net asset value, end of period $9.77
Total return(2) 5.70%
- --------------------------------------------------------------------------------
Ratios/Supplemental Data: 1998 1997
- --------------------------------------------------------------------------------
Net assets, end of period (000) $207(4)
Average net assets (000) $202(4)
Ratio of average net assets:
Expenses .77%(3)
Net investment income 6.52%(3)
Portfolio turnover rate 210%
- --------------------------------------------------------------------------------
(1) Information shown is for the period from February 26, 1997 (when Class Z
shares were first offered) through November 30, 1997.
(2) Total return assumes reinvestment of dividends and any other distributions.
It is calculated assuming shares are purchased on the first day and sold on
the last day of each period reported. Total return for periods of less than
a full year is not annualized.
(3) Annualized.
(4) Figure is actual and not rounded to nearest thousand.
- --------------------------------------------------------------------------------
28 Short-Intermediate Series [GRAPHIC] (800) 225-1852
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
[This page has been left blank intentionally.]
- --------------------------------------------------------------------------------
29
<PAGE>
- --------------------------------------------------------------------------------
The Prudential Mutual Fund Family
- --------------------------------------------------------------------------------
Prudential offers a broad range of mutual funds designed to meet your individual
needs. For information about these funds, contact your financial adviser or call
us at (800) 225-1852. Read the prospectus carefully before you invest or send
money.
STOCK FUNDS GLOBAL FUNDS
Prudential Distressed Securities Global Stock Funds
Fund, Inc. Prudential Developing Markets Fund
Prudential Emerging Growth Fund, Inc. Prudential Developing Markets
Prudential Equity Fund, Inc. Equity Fund
Prudential Equity Income Fund Prudential Latin America Equity Fund
Prudential Index Series Fund Prudential Europe Growth Fund, Inc.
Prudential Small-Cap Index Fund Prudential Global Genesis Fund, Inc.
Prudential Stock Index Fund Prudential Index Series Fund
The Prudential Investment Prudential Europe Index Fund
Portfolios, Inc. Prudential Pacific Index Fund
Prudential Jennison Growth Fund Prudential Natural Resources
Prudential Jennison Growth Fund, Inc.
& Income Fund Prudential Pacific Growth Fund, Inc.
Prudential Mid-Cap Value Fund Prudential World Fund, Inc.
Prudential Real Estate Securities Fund Global Series
Prudential Small-Cap Quantum International Stock Series
Fund, Inc. Global Utility Fund, Inc.
Prudential Small Company Value
Fund, Inc. Global Bond Funds
Prudential Tax-Managed Equity Fund Prudential Global Limited Maturity
Prudential 20/20 Focus Fund Fund, Inc.
Prudential Utility Fund, Inc. Limited Maturity Portfolio
Nicholas-Applegate Fund, Inc. Prudential Intermediate Global
Nicholas-Applegate Growth Income Fund, Inc.
Equity Fund Prudential International Bond
Fund, Inc.
Asset Allocation/Balanced Funds The Global Total Return Fund, Inc.
Prudential BalancedFund
Prudential Diversified Funds
Conservative Growth Fund
Moderate Growth Fund
High Growth Fund
The Prudential Investment
Portfolios,Inc.
Prudential Active Balanced Fund
- --------------------------------------------------------------------------------
30 Short-Intermediate Series [GRAPHIC] (800) 225-1852
<PAGE>
- --------------------------------------------------------------------------------
The Prudential Mutual Fund Family>>
- --------------------------------------------------------------------------------
BOND FUNDS MONEY MARKET FUNDS
Taxable Bond Funds Taxable Money Market Funds
Prudential Diversified Bond Fund, Inc. Cash Accumulation Trust
Prudential Government Income Liquid Assets Fund
Fund, Inc. National Money Market Fund
Prudential Government Securities Trust Prudential Government Securities Trust
Short-Intermediate Term Series Money Market Series
Prudential High Yield Fund, Inc. U.S. Treasury Money Market Series
Prudential High Yield Total Return Prudential Special Money Market
Fund, Inc. Fund, Inc.
Prudential Index Series Fund Money Market Series
Prudential Bond Market Index Fund Prudential MoneyMart Assets, Inc.
Prudential Structured Maturity
Fund, Inc. Tax-Free Money Market Funds
Income Portfolio Prudential Tax-Free Money Fund, Inc.
Prudential California Municipal Fund
Tax-Exempt Bond Funds California Money Market Series
Prudential California Municipal Fund Prudential Municipal Series Fund
California Series Connecticut Money Market Series
California Income Series Massachusetts Money Market Series
Prudential Municipal Bond Fund New Jersey Money Market Series
High Income Series New York Money Market Series
Insured Series
Prudential Municipal Series Fund Command Funds
Florida Series Command Money Fund
Massachusetts Series Command Government Fund
New Jersey Series Command Tax-Free Fund
New York Series
North Carolina Series Institutional Money Market Funds
Ohio Series Prudential Institutional Liquidity
Pennsylvania Series Portfolio, Inc.
Prudential National Municipals Institutional Money Market Series
Fund, Inc.
- --------------------------------------------------------------------------------
31
<PAGE>
- --------------------------------------------------------------------------------
FOR MORE INFORMATION:
- --------------------------------------------------------------------------------
Please read this prospectus before You can also obtain copies of
you invest in the Series and keep Series documents from the
it for future reference. For Securities and Exchange
information or shareholder Commission as follows:
questions contact:
By Mail:
Prudential Mutual Fund Services LLC Securities and Exchange Commission
P.O. Box 15005 Public Reference Section
New Brunswick, NJ 08906-5005 Washington, DC 20549-6009
(800) 225-1852 (The SEC charges a fee to copy
(732) 417-7555 documents.)
(if calling from outside the U.S.)
In Person:
- ------------------------------------ Public Reference Room in
Outside Brokers Should Contact: Washington, DC
Prudential Investment Management (For hours of operation, call
Services LLC 1(800) SEC-0330)
P.O. Box 15035
New Brunswick, NJ 08906-5035 Via the Internet:
(800) 778-8769 http://www.sec.gov
- ------------------------------------ ---------------------------------------
Visit Prudential's Web Site At: CUSIP Numbers:
http://www.prudential.com Class A: 744342106
Class Z: 744342601
- ------------------------------------
Additional information about the Fund Investment Company Act File No:
can be obtained without charge and can 811-3264
be found in the following documents:
Statement of Additional
Information (SAI)
(incorporated by reference into
this prospectus)
Annual Report
Semi-Annual Report
MF111A [LOGO] Printed on Recycled Paper
- --------------------------------------------------------------------------------
<PAGE>
PRUDENTIAL GOVERNMENT SECURITIES TRUST
Statement of Additional Information
dated April , 1999
Prudential Government Securities Trust (the Trust) is offered in three
series: the U.S. Treasury Money Market Series, the Money Market Series and the
Short-Intermediate Term Series. Each series operates as a separate fund with its
own investment objectives and policies designed to meet its specific investment
goals. The investment objective of the U.S. Treasury Money Market Series is high
current income consistent with the preservation of principal and liquidity. The
investment objective of the Money Market Series is to obtain high current
income, preservation of capital and maintenance of liquidity. The investment
objective of the Short-Intermediate Term Series is to achieve a high level of
income consistent with providing reasonable safety. There can be no assurance
that any series' investment objective will be achieved.
The Trust's address is Gateway Center Three, 100 Mulberry Street, Newark,
NJ 07102-4077, 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 U.S. Treasury Money Market Series
Prospectus, Money Market Series Prospectus or Short-Intermediate Term Series
Prospectus, each dated April __, 1999, copies of which may be obtained from the
Trust upon request.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
------
<S> <C>
Trust History ................................................ B-2
Description of the Trust, Its Investments and Risks .......... B-2
U.S. Treasury Money Market Series ............................ B-2
Money Market Series .......................................... B-2
Short-Intermediate Term Series ............................... B-4
Investment Restrictions ...................................... B-19
Management of the Trust ...................................... B-21
Control Persons and Principal Holders of Securities .......... B-24
Investment Advisory and Other Services ....................... B-25
Brokerage Allocation and Other Practices ..................... B-28
Capital Shares, Other Securities and Organization ............ B-28
Purchase, Redemption and Pricing of Trust Shares ............. B-29
Shareholder Investment Account ............................... B-31
Net Asset Value .............................................. B-34
Taxes, Dividends and Distributions ........................... B-35
Performance Information ...................................... B-36
Money Market Series and U.S. Treasury
Money Market Series-Calculation of Yield ................. B-36
Short-Intermediate Term Series-Calculation
of Yield and Total Return ................................ B-37
Financial Statements ......................................... B-38
Report of Independent Accountants ............................ B-51
Appendix I-General Investment Information .................... I-1
Appendix II-Historical Performance Data ...................... II-1
Appendix III-Information Relating to The Prudential .......... III-1
</TABLE>
- --------------------------------------------------------------------------------
MF111B
B-1
<PAGE>
TRUST HISTORY
The Trust was organized under the laws of Massachusetts on July 1, 1982 as
an unincorporated business trust, a form of organization that is commonly known
as a Massachusetts business trust.
DESCRIPTION OF THE TRUST, ITS INVESTMENTS AND RISKS
(a) CLASSIFICATION. The Trust is a diversified open-end, management
investment company whose shares of beneficial interest are presently offered in
three series.
(b) and (c) INVESTMENT STRATEGIES, POLICIES AND RISKS. Each Series operates
as a separate fund with its own investment objectives and policies designed to
meet its specific investment goals. The investment objective of the U.S.
Treasury Money Market Series is high current income consistent with the
preservation of principal and liquidity. The investment objective of the Money
Market Series is to obtain high current income, preservation of capital and
maintenance of liquidity. The investment objective of the Short-Intermediate
Term Series is to achieve a high level of income consistent with providing
reasonable safety. The Series may not be successful in achieving their
objectives and you could lose money.
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.
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. See
"When-Issued and Delayed Delivery Securities" below.
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. Obligations of the Government
National Mortgage Association (GNMA), the Farmers Home Administration and the
Small Business Administration 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 Trust must look principally to the agency issuing or
guaranteeing the obligation for ultimate repayment and may not be able to assert
a claim against the United States itself in the event the agency or
instrumentality does not meet its commitments. Securities in which the Money
Market Series may invest which are not backed by the full faith and credit of
the United States include, but are not limited to, obligations of the Tennessee
Valley Authority, the Federal National Mortgage Association (FNMA) and the
United States Postal Service, each of which has the right to borrow from the
United States Treasury to meet its obligations, and obligations of the Federal
Farm Credit System and the Federal Home Loan Banks, whose obligations may only
be satisfied by the individual credits of each issuing agency. Treasury
securities include Treasury bills, Treasury notes and Treasury bonds, all of
which are backed by the full faith and credit of the United States, as are
obligations of the Government National Mortgage Association, the Farmers Home
Administration and the Export-Import Bank. The Money Market Series will invest
at least 80% of its assets in such types of government securities.
MORTGAGE-BACKED SECURITIES. The Money Market Series may invest in
mortgage-backed securities, which are securities that directly or indirectly
represent a participation in, or are secured by and payable from, fixed or
adjustable rate 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, (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
U.S. Government guarantee but usually having some form of private credit
enhancement.
B-2
<PAGE>
Private mortgage pass-through securities are structured similarly to the
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. For a more complete description of
the types of mortgage-backed securities in which the Money Market Series may
invest, see "Short-Intermediate Term Series-U.S. Government Securities" and
"-Mortgage-Backed and Asset-Backed Securities."
ASSET-BACKED SECURITIES. Through the use of trusts and special purpose
corporations, various types of assets, primarily home equity loans and
automobile and credit card receivables are being securitized in pass-through
structures similar to the mortgage-backed securities described above. The Money
Market Series may invest in these and other types of asset-backed securities
which may be developed in the future. The remaining maturity of an asset-backed
security will be deemed to be equal to the average maturity of the assets
underlying such security determined by the investment adviser on the basis of
assumed prepayment rates and other factors with respect to such assets. In
general, these types of loans are of shorter duration than mortgage loans and
are less likely to have substantial prepayments.
For a description of the risks of investing in mortgage-backed and
asset-backed securities, see "Short-Intermediate Term Series-Mortgage-Backed and
Asset-Backed Securities-Risk Factors Relating to Investing in Mortgage-Backed
and Asset-Backed Securities."
U.S. TREASURY SECURITIES. The 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, (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.
CERTIFICATES OF DEPOSIT. 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 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. 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.
B-3
<PAGE>
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.
SHORT-INTERMEDIATE TERM SERIES
- ------------------------------
The Short-Intermediate Term Series' investment objective is to achieve a
high level of income consistent with providing reasonable safety. In seeking to
achieve its objective, the Series will under normal circumstances invest at
least 65% of its total assets in U.S. Government securities, including U.S.
Treasury Bills, Notes, Bonds and other debt securities issued by the U.S.
Treasury, and obligations issued, including mortgage-backed securities, asset
backed securities and other securities, or guaranteed by the U.S. Government,
its agencies or instrumentalities. The Series may also invest up to 35% of its
assets in fixed-rate and adjustable rate mortgage-backed securities,
asset-backed securities, corporate debt securities (among other privately issued
instruments), rated A or better by Standard & Poor's Ratings Group or Moody's
Investors Service, Inc. or comparably rated by any other Nationally Recognized
Statistical Rating Organization (NRSRO) or, if unrated, determined to be of
comparable quality by the Series' investment adviser, and money market
instruments of a comparable short-term rating. The Series may also engage in
various strategies using derivatives, including the use of put and call options
on securities and financial indices, transactions involving futures contracts
and related options, short selling and use of leverage, including reverse
repurchase agreements and dollar rolls, which entail additional risks to the
Series.
The Short-Intermediate Term Series intends to vary the proportion of its
holdings of longer and shorter-term debt securities in order to reflect its
assessment of prospective changes in interest rates even if such action may
adversely affect current income. For example, if, in the opinion of the
Short-Intermediate Term Series' investment adviser, interest rates generally are
expected to decline, the Short-Intermediate Term Series may sell its
shorter-term securities and purchase longer-term securities in order to benefit
from greater than expected relative price appreciation; the securities sold may
have a higher current yield than those being purchased. The success of this
strategy will depend on the investment adviser's ability to forecast changes in
interest rates. Moreover, the Short-Intermediate Term Series intends to manage
its portfolio actively by taking advantage of trading opportunities such as
sales of portfolio securities and purchases of higher yielding securities of
similar quality due to distortions in normal yield differentials. In addition,
if, in the opinion of the investment adviser market conditions warrant, the
Short-Intermediate Term Series may purchase U.S. Government securities at a
discount or trade securities in response to fluctuations in interest rates to
provide for the prospect of modest capital appreciation at maturity.
U.S. GOVERNMENT SECURITIES
MORTGAGE-RELATED SECURITIES ISSUED OR GUARANTEED BY U.S. GOVERNMENT
AGENCIES AND INSTRUMENTALITIES. The Short-Intermediate Term Series may purchase
mortgage-related securities issued or guaranteed by the U.S. Government, its
agencies or instrumentalities, including GNMA, FNMA and FHLMC certificates. See
"Mortgage-Backed Securities" below. Mortgages backing the securities which may
be purchased by the Short-Intermediate Term Series include conventional
thirty-year fixed rate mortgages, graduated payment mortgages, fifteen-year
mortgages, adjustable rate mortgages and balloon payment mortgages. A balloon
payment mortgage-backed security is an amortized mortgage security with
installments of principal and
B-4
<PAGE>
interest, the last installment of which is predominately principal. All of these
mortgages can be used to create pass-through securities. A pass-through security
is formed when mortgages are pooled together and undivided interests in the pool
or pools are sold. The cash flow from the mortgages is passed through to the
holders of the securities in the form of periodic payments of interest,
principal and prepayments (net of a service fee). Prepayments occur when the
holder of an undivided mortgage prepays the remaining principal before the
mortgage's scheduled maturity date. As a result of the pass-through of
prepayments of principal on the underlying securities, mortgage-backed
securities are often subject to more rapid prepayment of principal than their
stated maturity would indicate. The remaining expected average life of a pool of
mortgage loans underlying a mortgage-backed security is a prediction of when the
mortgage loans will be repaid and is based upon a variety of factors, such as
the demographic and geographic characteristics of the borrowers and the
mortgaged properties, the length of time that each of the mortgage loans has
been outstanding, the interest rates payable on the mortgage loans and the
current interest rate environment.
During periods of declining interest rates, prepayment of mortgages
underlying mortgage-backed securities can be expected to accelerate. When
mortgage obligations are prepaid, the Short-Intermediate Term Series reinvests
the prepaid amounts in securities, the yields of which reflect interest rates
prevailing at that time. Therefore, the Short-Intermediate Term Series' ability
to maintain a portfolio of high-yielding mortgage-backed securities will be
adversely affected to the extent that prepayments of mortgages are reinvested in
securities which have lower yields than the prepaid mortgages. Moreover,
prepayments of mortgages which underlie securities purchased at a premium
generally will result in capital losses. During periods of rising interest
rates, the rate of prepayment of mortgages underlying mortgaged-backed
securities can be expected to decline, extending the projected average maturity
of the mortgage-backed securities. This maturity extension risk may effectively
change a security which was considered short- or intermediate-term at the time
of purchase into a long-term security. The value of long-term securities
generally fluctuate more widely in response to changes in interest rates than
short- or intermediate-term securities.
GNMA CERTIFICATES. GNMA is a wholly-owned corporate instrumentality of the
United States within the Department of Housing and Urban Development. The
National Housing Act of 1934, as amended (the Housing Act), authorizes GNMA to
guarantee the timely payment of the principal of and interest on certificates
that are based on and backed by a pool of mortgage loans issued by the Federal
Housing Administration under the Housing Act, or Title V of the Housing Act of
1949 (FHA Loans), or guaranteed by the Veterans' Administration under the
Servicemen's Readjustment Act of 1944, as amended (VA Loans), or by pools of
other eligible mortgage loans. The Housing Act provides that the full faith and
credit of the U.S. Government is pledged to the payment of all amounts that may
be required to be paid under the guarantee. In order to meet its obligations
under such guarantee, GNMA is authorized to borrow from the U.S. Treasury with
no limitations as to amount.
The GNMA Certificates will represent a pro rata interest in one or more
pools of the following types of mortgage loans: (1) fixed rate level payment
mortgage loans; (2) fixed rate graduated payment mortgage loans; (3) fixed rate
growing equity mortgage loans; (4) fixed rate mortgage loans secured by
manufactured (mobile) homes; (5) mortgage loans on multifamily residential
properties under construction; (6) mortgage loans on completed multifamily
projects; (7) fixed rate mortgage loans as to which escrowed funds are used to
reduce the borrower's monthly payments during the early years of the mortgage
loans ("buydown" mortgage loans); (8) mortgage loans that provide for
adjustments in payments based on periodic changes in interest rates or in other
payment terms of the mortgage loans; and (9) mortgage-backed serial notes. All
of these mortgage loans will be FHA Loans or VA Loans and, except as otherwise
specified above, will be fully-amortizing loans secured by first liens on one to
four-family housing units.
FNMA CERTIFICATES. FNMA is a federally chartered and privately owned
corporation organized and existing under the Federal National Mortgage
Association Charter Act. FNMA provides funds to the mortgage market primarily by
purchasing home mortgage loans from local lenders, thereby replenishing their
funds for additional lending. FNMA acquires funds to purchase home mortgage
loans from many capital market investors that may not ordinarily invest in
mortgage loans directly.
Each FNMA Certificate will entitle the registered holder thereof to receive
amounts, representing such holder's pro rata interest in scheduled principal
payments and interest payments (at such FNMA Certificate's pass-through rate,
which is net of any servicing and guarantee fees on the underlying mortgage
loans), and any principal prepayments on the mortgage loans in the pool
represented by such FNMA Certificate and such holder's proportionate interest in
the full principal amount of any foreclosed or otherwise finally liquidated
mortgage loan. The full and timely payment of principal and interest on each
FNMA Certificate will be guaranteed by FNMA, which guarantee is not backed by
the full faith and credit of the U.S.
Government.
Each FNMA Certificate will represent a pro rata interest in one or more
pools of FHA Loans, VA Loans or conventional mortgage loans (that is, mortgage
loans that are not insured or guaranteed by any governmental agency) of the
following types: (1) fixed rate level payment mortgage loans; (2) fixed rate
growing equity mortgage loans; (3) fixed rate graduated payment mortgage loans;
(4) variable rate California mortgage loans; (5) other adjustable rate mortgage
loans; and (6) fixed rate mortgage loans secured by multifamily projects.
FHLMC CERTIFICATES. FHLMC is a corporate instrumentality of the United
States created pursuant to the Emergency Home Finance Act of 1970, as amended
(the FHLMC Act). The principal activity of FHLMC consists of the purchase of
first lien,
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conventional, residential mortgage loans and participation interests in such
mortgage loans and the resale of the mortgage loans so purchased in the form of
mortgage securities, primarily FHLMC Certificates.
FHLMC guarantees to each registered holder of the FHLMC Certificate the
timely payment of interest at the rate provided for by such FHLMC Certificate,
whether or not received. FHLMC also guarantees to each registered holder of a
FHLMC Certificate ultimate collection of all principal on the related mortgage
loans, without any offset or deduction, but does not, generally, guarantee the
timely payment of scheduled principal. FHLMC may remit the amount due on account
of its guarantee of collection of principal at any time after default on an
underlying mortgage loan, but not later than 30 days following (1) foreclosure
sale, (2) payment of a claim by any mortgage insurer or (3) the expiration of
any right of redemption, whichever occurs later, but in any event no later than
one year after demand has been made upon the mortgagor for accelerated payment
of principal. The obligations of FHLMC under its guarantee are obligations
solely of FHLMC and are not backed by the full faith and credit of the U.S.
Government.
FHLMC Certificates represent a pro rata interest in a group of mortgage
loans (a FHLMC Certificate group) purchased by FHLMC. The mortgage loans
underlying the FHLMC Certificates will consist of fixed rate or adjustable rate
mortgage loans with original terms to maturity of between ten and thirty years,
substantially all of which are secured by first liens on one to four-family
residential properties or multifamily projects. Each mortgage loan must meet the
applicable standards set forth in the FHLMC Act. An FHLMC Certificate group may
include whole loans, participation interests in whole loans and undivided
interests in whole loans and participations comprising another FHLMC Certificate
group.
STRIPS. The Short-Intermediate Term Series 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 (1) obligations from which
the interest coupons have been stripped, (2) the interest coupons that are
stripped, (3) book entries at a Federal Reserve member bank representing
ownership of obligation components or (4) 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. U.S. Government obligations, including
those underlying such receipts, are backed by the full faith and credit of the
U.S. Government.
The Series may also invest in mortgage pass-through securities where all
interest payments go to one class of holders (Interest Only Securities or IOs)
and all principal payments go to a second class of holders (Principal Only
Securities or POs). These securities are commonly referred to as mortgage-backed
securities strips or MBS strips.
The yields to maturity on IOs are very sensitive to the rate of principal
payments (including prepayments) on the related underlying assets, and a rapid
rate of principal payments may have a material adverse effect on the yield to
maturity. If the underlying assets experience greater than anticipated
prepayments of principal, the Series may not fully recoup its initial investment
in these securities. Conversely, if the underlying assets experience less than
anticipated prepayments of principal, the yield on POs could be materially
adversely affected.
SPECIAL CONSIDERATIONS. Fixed income U.S. Government securities are
considered among the most creditworthy of fixed income investments. The yields
available from U.S. Government securities are generally lower than the yields
available from corporate debt securities. The values of U.S. Government
securities will change as interest rates fluctuate. To the extent U.S.
Government securities are not adjustable rate securities, these changes in value
in response to changes in interest rates generally will be more pronounced.
During periods of falling interest rates, the values of outstanding long-term
fixed rate U.S. Government securities generally rise. Conversely, during periods
of rising interest rates, the values of such securities generally decline. The
magnitude of these fluctuations will generally be greater for securities with
longer maturities. Although changes in the value of U.S. Government securities
will not affect investment income from those securities, they may affect the net
asset value of the Short-Intermediate Term Series.
At a time when the Short-Intermediate Term Series has written call options
on a portion of its U.S. Government securities, its ability to profit from
declining interest rates will be limited. Any appreciation in the value of the
securities held in the portfolio above the strike price would likely be
partially or wholly offset by unrealized losses on call options written by the
Short-Intermediate Term Series. The termination of option positions under these
conditions would generally result in the realization of capital losses, which
would reduce the Short-Intermediate Term Series' capital gains distribution.
Accordingly, the Short-Intermediate Term Series would generally seek to realize
capital gains to offset realized losses by selling portfolio securities. In such
circumstances, however, it is likely that the proceeds of such sales would be
reinvested in lower yielding securities.
MORTGAGE-BACKED AND ASSET-BACKED SECURITIES
Mortgage-backed securities are securities that directly or indirectly
represent a participation in, or are secured by and payable from, fixed or
adjustable rate mortgage loans secured by real property. There are currently
three basic types of mortgage-backed
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securities: (1) 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; (2) 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 (3) those issued by private issuers that represent an
interest in or are collateralized by whole mortgage loans or mortgage-backed
securities without a U.S. Government guarantee but usually having some form of
private credit enhancement.
Private mortgage pass-through securities are structured similarly to the
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. See "Types of Credit Enhancement"
below.
ADJUSTABLE RATE MORTGAGE SECURITIES. The Short-Intermediate Term Series may
invest in adjustable rate mortgage securities (ARMs), which are pass-through
mortgage securities collateralized by mortgages with adjustable rather than
fixed rates. Generally, ARMs have a specified maturity date and amortize
principal over their life. 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 m ay 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.
In periods of declining interest rates, there is a reasonable likelihood
that ARMs will experience increased rates of prepayment of principal. However,
the major difference between ARMs and fixed rate mortgage securities is that the
interest rate and the rate of amortization of principal of ARMs can and do
change in accordance with movements in a particular, pre-specified, published
interest rate index.
The amount of interest on an ARM is calculated by adding a specified
amount, the "margin," to the index, subject to limitations on the maximum and
minimum interest that can be charged to the mortgagor during the life of the
mortgage or to maximum and minimum changes to that interest rate during a given
period. Because the interest rate on ARMs generally moves in the same direction
as market interest rates, the market value of ARMs tends to be more stable than
that of long-term fixed rate securities.
There are two main categories of indices which serve as benchmarks for
periodic adjustments to coupon rates on ARMs; those based on U.S. Treasury
securities and those derived from a calculated measure such as a cost of funds
index or a moving average of mortgage rates. Commonly utilized indices include
the one-year and five-year constant maturity Treasury Note rates, the
three-month Treasury Bill rate, the 180-day Treasury Bill rate, rates on
longer-term Treasury securities, the 11th District Federal Home Loan Bank Cost
of Funds, the National Median Cost of Funds, the one-month or three-month London
Interbank Offered Rate (LIBOR), the prime rate of a specific bank, or commercial
paper rates. Some indices, such as the one-year constant maturity Treasury Note
rate, closely mirror changes in market interest rate levels. Others, such as the
11th District Home Loan Bank Cost of Funds index (often related to ARMs issued
by FNMA), tend to lag changes in market rate levels and tend to be somewhat less
volatile.
COLLATERALIZED MORTGAGE OBLIGATIONS (CMOS) AND REAL ESTATE MORTGAGE
INVESTMENT CONDUITS (REMICS). A CMO is a debt security that is backed by a
portfolio of mortgages or mortgage-backed securities. The issuer's obligation to
make interest and principal payments is secured by the underlying portfolio of
mortgages or mortgage-backed 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 is collectively
referred to as Mortgage Assets). Multi-class pass-through securities are equity
interests in a trust composed of Mortgage Assets. Payments of principal 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
multi-class 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 REMIC. All future references to
CMOs 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
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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 the CMOs on a monthly, quarterly or semi-annual basis. The
principal and interest on the Mortgage Assets may be allocated among the several
classes 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 is 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 Short-Intermediate Term Series also may invest in, among other things,
parallel pay CMOs and Planned Amortization Class CMOs (PAC Bonds). Parallel pay
CMOs are structured to provide payments of principal on each payment date to
more than one class. These simultaneous payments are taken into account in
calculating the stated maturity date of 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.
Certain issuers of CMOs, including certain CMOs that have elected to be
treated as REMICs, are not considered investment companies pursuant to a rule
recently adopted by the SEC, and the Short-Intermediate Term Series may invest
in the securities of such issuers without the limitations imposed by the
Investment Company Act on investments by the Short-Intermediate Term Series in
other investment companies. In addition, in reliance on an earlier SEC
interpretation, the Short-Intermediate Term Series' investments in certain other
qualifying CMOs, which cannot or do not rely on the rule, are also not subject
to the limitation of the Investment Company Act on acquiring interests in other
investment companies. In order to be able to rely on the SEC's interpretation,
these CMOs must be unmanaged, fixed asset issuers, that (a) invest primarily in
mortgage-backed securities, (b) do not issue redeemable securities, (c) operate
under general exemptive orders exempting them from all provisions of the
Investment Company Act and (d) are not registered or regulated under the
Investment Company Act as investment companies. To the extent that the Series
selects CMOs or REMICs that cannot rely on the rule or do not meet the above
requirements the Series may not invest more than 10% of its assets in all such
entities and may not acquire more than 3% of the voting securities of any single
such entity.
The underlying mortgages which collateralized the CMOs and REMICs in which
the Series invests will frequently have caps and floors which limit the maximum
amount by which the loan rate to the residential borrower may change up or down
(1) per reset or adjustment interval and (2) over the life of the loan. Some
residential mortgage loans restrict periodic adjustments by limiting changes in
the borrower's monthly principal and interest payments rather than limiting
interest rate changes. These payment caps may result in negative amortization.
STRIPPED MORTGAGE-BACKED SECURITIES (PRIVATELY ISSUED). In addition to MBS
strips issued by agencies or instrumentalities of the U.S. Government, the
Series 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.
ASSET-BACKED SECURITIES. Through the use of trusts and special purpose
corporations, various types of assets, primarily home equity loans and
automobile and credit card receivables, are being securitized in pass-through
structures similar to the mortgage pass-through structures described above or in
a pay-through structure similar to the collateralized mortgage structure. The
Series may invest in these and other types of asset-backed securities which may
be developed in the future. Asset-backed securities present certain risks that
are not presented by mortgage-backed securities. The remaining maturity of an
asset-backed security will be deemed to be equal to the average maturity of the
assets underlying such security determined by the investment adviser on the
basis of assumed prepayment rates and other factors with respect to such assets.
In general, these types of loans are of shorter duration than mortgage loans and
are less likely to have substantial prepayments.
TYPES OF CREDIT ENHANCEMENT. Mortgage-backed securities and asset-backed
securites are often backed by a pool of assets representing the obligations of a
number of different parties. To lessen the effect of failures by obligors on
underlying assets to make payments, those securities may contain elements of
credit support which fall into two categories: (i) liquidity protection and (ii)
protection against losses resulting from ultimate default by an obligor on the
underlying assets. Liquidity protection refers to the provisions 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 aversely affect the return on an investment in a security. The
Series will not pay any additional fees for credit support, although the
existence of credit support may increase the price of security.
RISK FACTORS RELATING TO INVESTING IN MORTGAGE-BACKED AND ASSET-BACKED
SECURITIES. Mortgage-backed securities, including those issued or guaranteed
privately or by the U.S. Government or one of its agencies or instrumentalities,
and
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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 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 Series purchases such a security at a premium, a prepayment rate
that is faster than expected will reduce yield to maturity, while a prepayment
rate that is slower than expected will have the opposite effect of increasing
yield to maturity. Alternatively, if the Series purchases these securities at a
discount, faster than expected prepayments will increase, while slower than
expected prepayments will reduce, yield to maturity. The Series may invest a
portion of its assets in derivative mortgage-backed securities such as MBS
strips which are highly sensitive to changes in prepayment and interest rates.
The investment adviser will seek to manage these risks (and potential benefits)
by diversifying its investments in such securities and through hedging
techniques.
In addition, mortgage-backed securities which are secured by manufactured
(mobile) homes and multi-family residential properties, such as GNMA and FNMA
certificates, are subject to a higher risk of default than are other types of
mortgage-backed securities. See "U.S. Government Securities" above. The
investment adviser will seek to minimize this risk by investing in
mortgage-backed securities rated at least A by Moody's and S&P.
Although the extent of prepayments on a pool of mortgage loans depends on
various economic and other factors, as a general rule prepayments on fixed rate
mortgage loans will increase during a period of falling interest rates and
decrease during a period of rising interest rates. Accordingly, amounts
available for reinvestment by the Series are likely to be greater during a
period of declining interest rates and, as a result, likely to be reinvested at
lower interest rates than during a period of rising interest rates. Asset-backed
securities, although less likely to experience the same prepayment rate as
mortgage-backed securities, may respond to certain of the same factors
influencing prepayments, while at other times different factors may predominate.
Mortgage-backed securities and asset-backed securities generally decrease in
value as a result of increases in interest rates and usually have less potential
for capital appreciation during periods of declining interest rates than other
fixed-income securities with comparable maturities because of the risk of
prepayment. In addition, to the extent such mortgage securities are purchased at
a premium, mortgage foreclosures and unscheduled principal prepayments generally
will result in some loss of the holders' principal to the extent of the premium
paid. On the other hand, if such mortgage securities are purchased at a
discount, an unscheduled prepayment of principal will increase current and total
returns and accelerate the recognition of income which when distributed to
shareholders will be taxable as ordinary income.
During periods of rising interest rates, the rate of prepayment of
mortgages underlying mortgage-backed securities can be expected to decline,
extending the projected average maturity of the mortgage-backed securities. The
maturity extension risk may effectively change a security which was considered
short- or intermediate-term at the time of purchase into a long-term security.
Long-term securities generally fluctuate more widely in response to changes in
interest rates than short- or intermediate-term securities.
Asset-backed securities involve certain risks that are not posed by
mortgage-backed securities, resulting mainly from the fact that asset-backed
securities do not usually contain the complete benefit of a security interest in
the related collateral. For example, credit card receivables generally are
unsecured and the debtors are entitled to the protection of a number of state
and federal consumer credit card laws, some of which may reduce the ability to
obtain full payment. In the case of automobile receivables, due to various legal
and economic factors, proceeds from repossessed collateral may not always be
sufficient to support payments on these securities.
OTHER INVESTMENTS. Obligations issued or guaranteed as to principal and
interest by the United States Government may be acquired by the
Short-Intermediate Term Series in the form of custodial receipts that evidence
ownership of future interest payments, principal payments or both on certain
United States Treasury notes or bonds. Such notes and bonds are held in custody
by a bank on behalf of the owners. These custodial receipts are known by various
names, including "Treasury Receipts," "Treasury Investment Growth Receipts"
(TIGRs) and "Certificates of Accrual on Treasury Securities" (CATS). The
Short-Intermediate Term Series will not invest more than 5% of its assets in
such custodial receipts.
HEDGING AND RETURN ENHANCEMENT STRATEGIES
The Short-Intermediate Term Series may also engage in various portfolio
strategies, including utilizing derivatives, to reduce certain risks of its
investments and to attempt to enhance return, but not for speculation. The
Series, and thus the investor, may lose money through any unsuccessful use of
these strategies. These strategies include the use of futures contracts and
options. The Series' ability to use these strategies may be limited by market
conditions, regulatory limits and there can be no assurance that any of these
strategies will succeed.
OPTIONS ON SECURITIES. The purchaser of a call option has the right, for a
specified period of time, to purchase the securities subject to the option at a
specified price (the "exercise price" or "strike price"). By writing a call
option, the Short-Intermediate Term Series becomes obligated during the term of
the option, upon exercise of the option, to deliver the underlying securities or
a specified amount of cash to the purchaser against receipt of the exercise
price. When the Short-Intermediate Term Series writes
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a call option, the Short-Intermediate Term Series loses the potential for gain
on the underlying securities in excess of the exercise price of the option
during the period that the option is open.
The purchaser of a put option has the right, for a specified period of
time, to sell the securities subject to the option to the writer of the put at
the specified exercise price. By writing a put option, the Short-Intermediate
Term Series becomes obligated during the term of the option, upon exercise of
the option, to purchase the securities underlying the option at the exercise
price. The Short-Intermediate Term Series might, therefore, be obligated to
purchase the underlying securities for more than their current market price.
The writer of an option retains the amount of any premium paid for the
writing of the option. The Series' maximum gain with respect to an option
written is the premium. In the case of a covered call option that is not
exercised, the amount of any premium may be offset or exceeded by a decline in
the value of the securities underlying the call option that the Series must
retain in order to maintain the "cover" on such option and, with respect to put
options written, the amount of any premium may be offset or exceeded by the
difference between the then current market price of the underlying security and
the strike price of the put option (the price at which the Series must purchase
the underlying security).
The Short-Intermediate Term Series may wish to protect certain portfolio
securities against a decline in market value at a time when put options on those
particular securities are not available for purchase. The Short-Intermediate
Term Series may therefore purchase a put option on other carefully selected
securities, the values of which the investment adviser expects will have a high
degree of positive correlation to the values of such portfolio securities. If
the investment adviser's judgment is correct, changes in the value of the put
options should generally offset changes in the value of the portfolio securities
being hedged. If the investment adviser's judgment is not correct, the value of
the securities underlying the put option may decrease less than the value of the
Short-Intermediate Term Series' investments and therefore the put option may not
provide complete protection against a decline in the value of the
Short-Intermediate Term Series' investments below the level sought to be
protected by the put option.
The Short-Intermediate Term Series may similarly wish to hedge against
appreciation in the value of debt securities that it intends to acquire at a
time when call options on such securities are not available. The
Short-Intermediate Term Series may, therefore, purchase call options on other
carefully selected debt securities the values of which the investment adviser
expects will have a high degree of positive correlation to the values of the
debt securities that the Short-Intermediate Term Series intends to acquire. In
such circumstances the Short-Intermediate Term Series will be subject to risks
analogous to those summarized below in the event that the correlation between
the value of call options so purchased and the value of the securities intended
to be acquired by the Short-Intermediate Term Series is not as close as
anticipated and the value of the securities underlying the call options
increases less than the value of the securities to be acquired by the
Short-Intermediate Term Series.
The Short-Intermediate Term Series may write options on securities in
connection with buy-and-write transactions; that is, the Short-Intermediate Term
Series may purchase a security and concurrently write a call option against that
security.
The exercise price of a call option may be below ("in-the-money"), equal to
("at-the-money") or above ("out-of-the-money") the current value of the
underlying security at the time the option is written. Buy-and-write
transactions using in-the-money call options may be used when it is expected
that the price of the underlying security will remain flat or decline moderately
during the option period. Buy-and-write transactions using at-the-money call
options may be used when it is expected that the price of the underlying
security will remain fixed or advance moderately during the option period. A
buy-and-write transaction using an out-of-the-money call option may be used when
it is expected that the premium received from writing the call option plus the
appreciation in the market price of the underlying security up to the exercise
price will be greater than the appreciation in the price of the underlying
security alone. If the call option is exercised in such a transaction, the
Short-Intermediate Term Series' maximum gain will be the premium received by it
for writing the option, adjusted upwards or downwards by the difference between
the Short-Intermediate Term Series' purchase price of the security and the
exercise price of the option. If the option is not exercised and the price of
the underlying security declines, the amount of the decline will be offset in
part, or entirely, by the premium received.
Prior to being notified of exercise of the option, the writer of an
exchange-traded option that wishes to terminate its obligation may effect a
"closing purchase transaction" by buying an option of the same series as the
option previously written. (Options of the same series are options with respect
to the same underlying security, having the same expiration date and the same
strike price.) The effect of the purchase is that the writer's position will be
cancelled by the exchange's affiliated clearing organization. Likewise, an
investor who is the holder of an exchange-traded option may liquidate a position
by effecting a "closing sale transaction" by selling an option of the same
series as the option previously purchased. There is no guarantee that either a
closing purchase or a closing sale transaction can be effected.
Exchange-traded options are issued by a clearing organization affiliated
with the exchange on which the option is listed which, in effect, gives its
guarantee to every exchange-traded option transaction. In contrast, OTC options
are contracts between the Short-Intermediate Term Series and its contra-party
with no clearing organization guarantee. Thus, when the Short-Intermediate Term
Series purchases an OTC option, it relies on the dealer from which it has
purchased the OTC option to make or take delivery
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of the securities underlying the option. Failure by the dealer to do so would
result in the loss of the premium paid by the Short-Intermediate Term Series as
well as the loss of the expected benefit of the transaction. The Board of
Trustees of the Trust has approved a list of dealers with which the
Short-Intermediate Term Series may engage in OTC options.
When the Short-Intermediate Term Series writes an OTC option, it generally
will be able to close out the OTC options prior to its expiration only by
entering into a closing purchase transaction with the dealer to which the
Short-Intermediate Term Series originally wrote the OTC option. While the
Short-Intermediate Term Series will enter into OTC options only with dealers
which agree to, and which are expected to be capable of, entering into closing
transactions with the Short-Intermediate Term Series. There can be no assurance
that the Short-Intermediate Term Series will be able to liquidate an OTC option
at a favorable price at any time prior to expiration. Until the
Short-Intermediate Term Series is able to effect a closing purchase transaction
in a covered OTC call option the Short-Intermediate Term Series has written, it
will not be able to liquidate securities used as cover until the option expires
or is exercised or different cover is substituted. In the event of insolvency of
the contra-party, the Short-Intermediate Term Series may be unable to liquidate
an OTC option.
OTC options purchased by the Short-Intermediate Term Series will be treated
as illiquid securities subject to any applicable limitation on such securities.
Similarly, the assets used to "cover" OTC options written by the
Short-Intermediate Term Series will be treated as illiquid unless the OTC
options are sold to qualified dealers who agree that the Short-Intermediate Term
Series may repurchase any OTC options it writes for a maximum price to be
calculated by a formula set forth in the option agreement. The "cover" for an
OTC option written subject to this procedure would be considered illiquid only
to the extent that the maximum repurchase price under the formula exceeds the
intrinsic value of the option.
The Short-Intermediate Term Series may write only "covered" options. This
means that so long as the Short-Intermediate Term Series is obligated as the
writer of a call option, it will own the underlying securities subject to the
option or an option to purchase the same underlying securities, having an
exercise price equal to or less than the exercise price of the "covered" option,
or will establish and maintain with the Trust's Custodian for the term of the
option a segregated account consisting of cash or other liquid assets having a
value equal to or greater than the fluctuating market value of the optioned
securities (the exercise price of the option). In the case of a straddle written
by the Short-Intermediate Term Series, the amount maintained in the segregated
account will equal the amount, if any, by which the put is "in-the-money."
OPTIONS ON SECURITIES INDICES. The Short-Intermediate Term Series also may
purchase and write put and call options on securities indices in an attempt to
hedge against market conditions affecting the value of securities that the
Short-Intermediate Term Series owns or intends to purchase, and not for
speculation. Through the writing or purchase of index options, the
Short-Intermediate Term Series can achieve many of the same objectives as
through the use of options on individual securities. Options on securities
indices are similar to options on a security except that, rather than the right
to take or make delivery of a security at a specified price, an option on a
securities index gives the holder the right to receive, upon exercise of the
option, an amount of cash if the closing level of the securities index upon
which the option is based is greater than, in the case of a call, or less than,
in the case of a put, the exercise price of the option. This amount of cash is
equal to such difference between the closing price of the index and the exercise
price of the option. The writer of the option is obligated, in return for the
premium received, to make delivery of this amount. Unlike security options, all
settlements are in cash and gain or loss depends upon price movements in the
market generally (or in a particular industry or segment of the market), rather
than upon price movements in individual securities. Price movements in
securities that the Short-Intermediate Term Series owns or intends to purchase
will probably not correlate perfectly with movements in the level of an index
and, therefore, the Short-Intermediate Term Series bears the risk that a loss on
an index option would not be completely offset by movements in the price of such
securities.
When the Short-Intermediate Term Series writes an option on a securities
index, it will be required to deposit with the Trust's Custodian, and
mark-to-market, eligible securities equal in value to 100% of the exercise price
in the case of a put, or the contract value in the case of a call. In addition,
where the Short-Intermediate Term Series writes a call option on a securities
index at a time when the contract value exceeds the exercise price, the
Short-Intermediate Term Series will segregate and mark-to-market, until the
option expires or is closed out, cash or cash equivalents equal in value to such
excess.
Options on a securities index involve risks similar to those risks relating
to transactions in financial futures contracts described below. Also, an option
purchased by the Short-Intermediate Term Series may expire worthless, in which
case the Short-Intermediate Term Series would lose the premium paid therefor.
OPTIONS ON GNMA CERTIFICATES. Options on GNMA Certificates are not
currently traded on any Exchange. However, the Short-Intermediate Term Series
may purchase and write such options should they commence trading on any Exchange
and may purchase or write OTC Options on GNMA Certificates.
Since the remaining principal balance of GNMA Certificates declines each
month as a result of mortgage payments, the Short-Intermediate Term Series as a
writer of a covered GNMA call holding GNMA Certificates as "cover" to satisfy
its delivery obligation in the event of assignment of an exercise notice, may
find that its GNMA Certificates no longer have a sufficient remaining
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principal balance for this purpose. Should this occur, the Short-Intermediate
Term Series will enter into a closing purchase transaction or will purchase
additional GNMA Certificates from the same pool (if obtainable) or replacement
GNMA Certificates in the cash market in order to remain covered.
A GNMA Certificate held by the Short-Intermediate Term Series to cover an
option position in any but the nearest expiration month may cease to represent
cover for the option in the event of a decline in the GNMA coupon rate at which
new pools are originated under the FHA/VA loan ceiling in effect at any given
time. Should this occur, the Short-Intermediate Term Series will no longer be
covered, and the Short-Intermediate Term Series will either enter into a closing
purchase transaction or replace the GNMA Certificate with a GNMA Certificate
which represents cover. When the Short-Intermediate Term Series closes its
position or replaces the GNMA Certificate, it may realize an unanticipated loss
and incur transaction costs.
FUTURES CONTRACTS. As a purchaser of a futures contract (futures contract),
the Short-Intermediate Term Series incurs an obligation to take delivery of a
specified amount of the obligation underlying the futures contract at a
specified time in the future for a specified price. As a seller of a futures
contract, the Short-Intermediate Term Series incurs an obligation to deliver the
specified amount of the underlying obligation at a specified time in return for
an agreed upon price. The Short-Intermediate Term Series may purchase futures
contracts on debt securities, aggregates of debt securities, financial indices
and U.S. Government securities including futures contracts or options linked to
the London Interbank Offered Rate (LIBOR).
The Short-Intermediate Term Series will purchase or sell futures contracts
for the purpose of hedging its portfolio (or anticipated portfolio) securities
against changes in prevailing interest rates. If the investment adviser
anticipates that interest rates may rise and, concomitantly, the price of the
Short-Intermediate Term Series' portfolio securities may fall, the
Short-Intermediate Term Series may sell a futures contract. If declining
interest rates are anticipated, the Short-Intermediate Term Series may purchase
a futures contract to protect against a potential increase in the price of
securities the Short-Intermediate Term Series intends to purchase. Subsequently,
appropriate securities may be purchased by the Short-Intermediate Term Series in
an orderly fashion; as securities are purchased, corresponding futures positions
would be terminated by offsetting sales of contracts. In addition, futures
contracts will be bought or sold in order to close out a short or long position
in a corresponding futures contract.
Although most futures contracts call for actual delivery or acceptance of
securities, the contracts usually are closed out before the settlement date
without the making or taking of delivery. A futures contract sale is closed out
by effecting a futures contract purchase for the same aggregate amount of the
specific type of security and the same delivery date. If the sale price exceeds
the offsetting purchase price, the seller would be paid the difference and would
realize a gain. If the offsetting purchase price exceeds the sale price, the
seller would pay the difference and would realize a loss. Similarly, a futures
contract purchase is closed out by effecting a futures contract sale for the
same aggregate amount of the specific type of security and the same delivery
date. If the offsetting sale price exceeds the purchase price, the purchaser
would realize a gain, whereas if the purchase price exceeds the offsetting sale
price, the purchaser would realize a loss. There is no assurance that the
Short-Intermediate Term Series will be able to enter into a closing transaction.
When the Short-Intermediate Term Series enters into a futures contract it
is initially required to deposit with the Trust's Custodian, in a segregated
account in the name of the broker performing the transaction, an "initial
margin" of cash or other liquid assets equal to approximately 2-3% of the
contract amount. Initial margin requirements are established by the Exchanges on
which futures contracts trade and may, from time to time, change. In addition,
brokers may establish margin deposit requirements in excess of those required by
the Exchanges. Under a recently adopted SEC rule, Short-Intermediate Term Series
may place and maintain cash or other liquid assets with a futures commissions
merchant in amounts necessary to effect such Series' transactions in
exchange-traded futures contracts and options thereon, provided certain
conditions are satisfied.
Initial margin in futures transactions is different from margin in
securities transactions in that initial margin does not involve the borrowing of
funds by a broker's client but is, rather, a good faith deposit on a futures
contract which will be returned to the Short-Intermediate Term Series upon the
proper termination of the futures contract. The margin deposits made are
marked-to-market daily and the Short-Intermediate Term Series may be required to
make subsequent deposits into the segregated account, maintained at the Trust's
Custodian for that purpose, of cash or other liquid assets, called "variation
margin," in the name of the broker, which are reflective of price fluctuations
in the futures contract.
OPTIONS ON FUTURES CONTRACTS. The Short-Intermediate Term Series may
purchase and sell call and put options on futures contracts which are traded on
an Exchange and enter into closing transactions with respect to such options to
terminate an existing position. An option on a futures contract gives the
purchaser the right (in return for the premium paid), and the writer the
obligation, to assume a position in a futures contract (a long position if the
option is a call and a short position if the option is a put) at a specified
exercise price at any time during the term of the option. Upon exercise of the
option, the assumption of an offsetting futures position by the writer and
holder of the option will be accompanied by delivery of the accumulated cash
balance in the writer's futures margin account which represents the amount by
which the market price of the futures contract at exercise exceeds, in the case
of a call, or is less than, in the case of a put, the exercise price of the
option on the futures contract.
The Short-Intermediate Term Series may only write "covered" put and call
options on futures contracts. The Short-Intermediate Term Series will be
considered "covered" with respect to a call option it writes on a futures
contract if the
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Short-Intermediate Term Series owns the assets which are deliverable under the
futures contract or an option to purchase that futures contract having a strike
price equal to or less than the strike price of the "covered" option and having
an expiration date not earlier than the expiration date of the "covered" option,
or if it segregates and maintains with the Custodian for the term of the option
cash, or other liquid equal assets to the fluctuating value of the optioned
future. The Short-Intermediate Term Series will be considered "covered" with
respect to a put option it writes on a futures contract if it owns an option to
sell that futures contract having a strike price equal to or greater than the
strike price of the "covered" option, or if it segregates and maintains with the
Custodian for the term of the option cash or other liquid assets at all times
equal in value to the exercise price of the put (less any initial margin
deposited by the Short-Intermediate Term Series with the Trust's Custodian with
respect to such option). There is no limitation on the amount of the
Short-Intermediate Term Series' assets which can be placed in the segregated
account.
The Short-Intermediate Term Series may purchase options on futures
contracts for identical purposes to those set forth above for the purchase of a
futures contract (purchase of a call option or sale of a put option) and the
sale of a futures contract (purchase of a put option or sale of a call option),
or to close out a long or short position in futures contracts. If, for example,
the investment adviser wished to protect against an increase in interest rates
and the resulting negative impact on the value of a portion of its U.S.
Government securities portfolio, it might purchase a put option on an interest
rate futures contract, the underlying security of which correlates with the
portion of the portfolio the investment adviser seeks to hedge.
RISKS OF HEDGING AND RETURN ENHANCEMENT STRATEGIES. Participation in the
options or futures markets involves investment risks and transaction costs to
which the Series would not be subject absent the use of these strategies. The
Short-Intermediate Term Series and thus its investors, may lose money through
the unsuccessful use of these strategies. If the investment adviser's
predictions of movements in the direction of the securities and interest rate
markets are inaccurate, the adverse consequences to the Short-Intermediate Term
Series may leave the Series in a worse position than if such strategies were not
used. Risks inherent in the use of options and futures contracts and options on
futures contracts include (1) dependence on the investment adviser's ability to
predict correctly movements in the direction of interest rates and securities
prices; (2) imperfect correlation between the price of options and futures
contracts and options thereon and movements in the prices of the securities or
currencies being hedged; (3) the fact that skills needed to use these strategies
are different from those needed to select portfolio securities; (4) the possible
absence of a liquid secondary market for any particular instrument at any time,
and (5) the possible inability of the Short-Intermediate Term Series to purchase
or sell a portfolio security at a time that otherwise would be favorable for it
to do so, or the possible need for the Short-Intermediate Term Series to sell a
portfolio security at a disadvantageous time, due to the need for the
Short-Intermediate Term Series to maintain cover or to segregate securities in
connection with hedging transactions.
The Short-Intermediate Term Series may sell a futures contract to protect
against the decline in the value of securities held by the Short-Intermediate
Term Series. However, it is possible that the futures market may advance and the
value of securities held in the Short-Intermediate Term Series' portfolio may
decline. If this were to occur, the Short-Intermediate Term Series would lose
money on the futures contracts and also experience a decline in value in its
portfolio securities. However, while this could occur for a very brief period or
to a very small degree, over time the market prices of the securities of a
diversified portfolio will tend to move in the same direction as the prices of
futures contracts.
If the Short-Intermediate Term Series purchases a futures contract to hedge
against the increase in value of securities it intends to buy, and the value of
such securities decreases, then the Short-Intermediate Term Series may determine
not to invest in the securities as planned and will realize a loss on the
futures contract that is not offset by a reduction in the price of the
securities.
There may exist an imperfect correlation between the price movements of
futures contracts purchased by the Short-Intermediate Term Series and the
movements in the prices of the securities (or currencies) which are the subject
of the hedge. If participants in the futures market elect to close out their
contracts through offsetting transactions rather than meet margin deposit
requirements, distortions in the normal relationships between the debt
securities (or currencies) and futures market could result. Price distortions
could also result if investors in futures contracts elect to make or take
delivery of underlying securities (or currencies) rather than engage in closing
transactions due to the resultant reduction in the liquidity of the futures
market. In addition, due to the fact that, from the point of view of
speculators, the deposit requirements in the futures markets are less onerous
than margin requirements in the cash market, increased participation by
speculators in the futures markets could cause temporary price distortions. Due
to the possibility of price distortions in the futures market and because of the
imperfect correlation between movements in the prices of securities (or
currencies) and movements in the prices of futures contracts, a correct forecast
of interest rate trends by the investment adviser may still not result in a
successful hedging transaction.
The risk of imperfect correlation increases as the composition of the
Short-Intermediate Term Series' securities portfolio diverges from the
securities that are the subject of the futures contract, for example, those
included in an index. Because the change in the price of the futures contract
may be more or less than the change in prices of the underlying securities, even
a correct forecast of interest rate changes may not result in a successful
hedging transaction.
Pursuant to the requirements of the Commodity Exchange Act, all futures
contracts and options thereon must be traded on an exchange. The
Short-Intermediate Term Series intends to purchase and sell futures contracts
only on exchanges where there
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appears to be market in such futures sufficiently active to accommodate the
volume of its trading activity. The Short-Intermediate Term Series' ability to
establish and close out positions in futures contracts and options on futures
contracts would be impacted by the liquidity of these exchanges. Although the
Short-Intermediate Term Series generally would purchase or sell only those
futures contracts and options thereon for which there appeared to be a liquid
market, there is no assurance that a liquid market on an exchange will exist for
any particular futures contract or option at any particular time. In the event
no liquid market exists for a particular futures contract or option thereon in
which the Short-Intermediate Term Series maintains a position, it would not be
possible to effect a closing transaction in that contract or to do so at a
satisfactory price and the Short-Intermediate Term Series would have to either
make or take delivery under the futures contract or, in the case of a written
call option, wait to sell the underlying securities until the option expired or
was exercised, or, in the case of a purchased option, exercise the option and
comply with the margin requirements for the underlying futures contract to
realize any profit. In the case of a futures contract or an option on a futures
contract which the Short-Intermediate Term Series had written and which the
Short-Intermediate Term Series was unable to close, the Short-Intermediate Term
Series would be required to maintain margin deposits on the futures contract or
option and to make variation margin payments until the contract is closed. In
the event futures contract have been sold to hedge portfolio securities, such
securities will not be sold until the offsetting futures contracts can be
executed. Similarly, in the event futures have been bought to hedge anticipated
securities purchases, such purchases will not be executed until the offsetting
futures contracts can be sold.
Exchanges on which futures and related options trade may impose limits on
the positions that the Short-Intermediate Term Series may take in certain
circumstances. In addition, the hours of trading of financial futures contracts
and options thereon may not conform to the hours during which the
Short-Intermediate Term Series may trade the underlying securities. To the
extent the futures markets close before the securities markets, significant
price and rate movements can take place in the securities markets that cannot be
reflected in the futures markets.
Under regulations of the Commodity Exchange Act, investment companies
registered under the Investment Company Act are exempt from the definition of
commodity pool operator, subject to compliance with certain conditions. The
Short-Intermediate Term Series may enter into futures or related options
contracts for return enhancement purposes if the aggregate initial margin and
option premiums do not exceed 5% of the liquidation value of the
Short-Intermediate Term Series' total assets, after taking into account
unrealized profits and unrealized losses on any such contracts, provided,
however, that in the case of an option that is in-the-money, the in-the-money
amount may be excluded in computing such 5%. The above restriction does not
apply to the purchase and sale of futures and related options contracts for BONE
FIDE hedging purchases within the meaning of the regulations of the CFTC.
In order to determine that the Short-Intermediate Term Series is entering
into transactions in futures contracts for hedging purposes as such term is
defined by the CFTC, either: (1) a substantial majority (that is approximately
75%) of all anticipatory hedge transactions (transactions in which the
Short-Intermediate Term Series does not own at the time of the transaction, but
expects to acquire, the securities underlying the relevant futures contract)
involving the purchase of futures contracts will be completed by the purchase of
securities which are the subject of the hedge, or (2) the underlying value of
all long positions in futures contracts will not exceed the total value of (a)
all short-term debt obligations held by the Short-Intermediate Term Series; (b)
cash held by the Short-Intermediate Term Series; (c) cash proceeds due to the
Short-Intermediate Term Series investments within thirty days; (d) the margin
deposited on the contracts; and (e) any unrealized appreciation in the value of
the contracts.
If the Short-Intermediate Term Series maintains a short position in a
futures contract, it will cover this position by holding, in a segregated
account, cash or liquid assets equal in value (when added to any initial or
variation margin or deposit) to the market value of the securities underlying
the futures contract. Such a position may also be covered by owning the
securities underlying the futures contract, or by holding a call option
permitting the Short-Intermediate Term Series to purchase the same contract at a
price no higher than the price at which the short position was established.
In addition, if the Short-Intermediate Term Series holds a long position in
a futures contract, it will hold cash or liquid assets equal to the purchase
price of the contract (less the amount of initial or variation margin on
deposit) in a segregated account. Alternatively, the Short-Intermediate Term
Series could cover its long position by purchasing a put option on the same
futures contract with an exercise price as high or higher than the price of the
contract held by the Short-Intermediate Term Series.
Exchanges limit the amount by which the price of a futures contract may
move on any day. If the price moves equal the daily limit on successive days,
then it may prove impossible to liquidate a futures position until the daily
limit moves have ceased. In the event of adverse price movements, the
Short-Intermediate Term Series would continue to be required to make daily cash
payments of variation margin on open futures positions. In such situations, if
the Short-Intermediate Term Series has insufficient cash, it may be
disadvantageous to do so. In addition, the Short-Intermediate Term Series may be
required to take or make delivery of the instruments underlying futures
contracts it holds at a time when it is disadvantageous to do so. The ability to
close out options and futures positions could also have an adverse impact on the
Short-Intermediate Term Series' ability to hedge effectively its portfolio.
In the event of the bankruptcy of a broker through which the
Short-Intermediate Term Series engages in transactions in futures or options
thereon, the Short-Intermediate Term Series could experience delays and/or
losses in liquidating open positions
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purchased or sold through the broker and/or incur a loss of all or part of its
margin deposits with the broker. Transactions are entered into by the
Short-Intermediate Term Series only with brokers or financial institutions
deemed creditworthy by the investment adviser.
RISKS OF TRANSACTIONS IN OPTIONS ON FUTURES CONTRACTS. Compared to the
purchase or sale of futures contracts, the purchase and sale of call or put
options on futures contracts involves less potential risk to the
Short-Intermediate Term Series because the maximum amount at risk is the premium
paid for the options (plus transaction costs). However, there may be
circumstances when the purchase of a call or put option on a futures contract
would result in a loss to the Short-Intermediate Term Series notwithstanding
that the purchase or sale of a futures contract would not result in a loss, as
in the instance where there is no movement in the prices of the futures contract
or underlying securities.
An option position may be closed out only on an exchange which provides a
secondary market for an option of the same series. As described above, although
the Short-Intermediate Term Series generally will purchase only those options
for which there appears to be an active secondary market, there is no assurance
that a liquid secondary market on an exchange will exist for any particular
option, or at any particular time, and for some options, no secondary market on
an exchange may exist. In such event, it might not be possible to effect closing
transactions in particular options, with the result that the Short-Intermediate
Term Series would have to exercise its options in order to realize any profit
and would incur transaction costs upon the sale of underlying securities
pursuant to the exercise of put options.
Reasons for the absence of a liquid secondary market on an exchange include
the following: (1) there may be insufficient trading interest in certain
options; (2) restrictions may be imposed by an exchange on opening transactions
or closing transactions or both; (3) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options or underlying securities; (4) unusual or unforeseen circumstances may
interrupt normal operations on an exchange; (5) the facilities of an exchange or
the Options Clearing Corporation may not at all times be adequate to handle
current trading volume; or (6) one more exchanges could, for economic or other
reasons, decide or be compelled at some future date to discontinue the trading
of options (or a particular class or series of options), in which event the
secondary market on that exchange (or in that class or series of options) would
cease to exist, although outstanding options on that exchange that had been
issued by the Options Clearing Corporation as a result of trades on that
exchange could continue to be exercisable in accordance with their terms.
There is no assurance that higher than anticipated trading activity or
other unforeseen events might not, at times, render certain of the facilities of
the Options Clearing Corporation inadequate, and thereby result in the
institution by an exchange of special procedures which may interfere with the
timely execution of customers' orders.
INTEREST RATE SWAP TRANSACTIONS
The Short-Intermediate Term Series may enter into interest rate swaps.
Interest rate swaps involve the exchange by the Series with another party of
their respective commitments to pay or receive interest, for example, an
exchange of floating rate payments for fixed rate payments. The Series expects
to enter into these transactions primarily to preserve a return or spread on a
particular investment or portion of its portfolio or to protect against any
increase in the price of securities the Fund anticipates purchasing at a later
date. The Series intends to use these transactions as a hedge and not as a
speculative investment.
The Series may enter into either asset-based interest rate swaps or
liability-based interest rate swaps, depending on whether it is hedging its
assets or its liabilities. The Short-Intermediate Term Series will usually enter
into interest rate swaps on a net basis, that is the two payment streams are
netted out, with the Short-Intermediate Term Series receiving or paying, as the
case may be, only the net amount of the two payments. Inasmuch as these hedging
transactions are entered into for good faith hedging purposes, the investment
adviser and the Short-Intermediate Term Series believe such obligations do not
constitute senior securities and, accordingly, will not treat them as being
subject to its borrowing restrictions. The net amount of the excess, if any, of
the Short-Intermediate Term Series' obligations over its entitlements with
respect to each interest rate swap will be accrued on a daily basis and an
amount of cash, U.S. Government securities, equity securities or other liquid,
unencumbered assets, marked-to-market daily having an aggregate net asset value
at least equal to the accrued excess will be maintained in a segregated account.
To the extent that the Short-Intermediate Term Series enters into interest rate
swaps on other than a net basis, the amount maintained in the segregated account
will be the full amount of the Short-Intermediate Term Series' obligations, if
any, with respect to such interest rate swaps, accrued on a daily basis. If
there is a default by the other party to such a transaction, the
Short-Intermediate Term Series will have contractual remedies pursuant to the
agreement related to the transaction. The swap market has grown substantially in
recent years with a large number of banks and investment banking firms acting
both as principals and as agents utilizing standardized swap documentation. As a
result, the swap market has become relatively liquid.
The use of interest rate swaps is highly speculative activity which
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. If the investment adviser is
incorrect in its forecast of market values, interest rates and other applicable
factors, the investment performance of the Short-Intermediate Term Series would
diminish compared to what it would have been if this investment technique was
never used.
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The Short-Intermediate Term Series may only enter into interest rate swaps
to hedge its portfolio. Interest rate swaps do not involve the delivery of
securities or other underlying assets or principal. Accordingly, the risk of
loss with respect to interest rate swaps is limited to the net amount of
interest payments that the Short-Intermediate Term Series is contractually
obligated to make. If the other party to an interest rate swap defaults, the
Short-Intermediate Term Series' risk of loss consists of the net amount of
interest payments, if any, that the Short-Intermediate Term Series is
contractually entitled to receive. Since interest rate swaps are individually
negotiated, the Short-Intermediate Term Series expects to achieve an acceptable
degree of correlation between its rights to receive interest on its portfolio
securities and its rights and obligations to receive and pay interest pursuant
to interest rate swaps. The Short-Intermediate Term Series will enter into
interest rate swaps only with parties meeting creditworthiness standards
approved by the Trust's Board of Trustees. The investment adviser will monitor
the creditworthiness of such parties under the supervision of the Trust's Board
of Trustees.
SHORT SALES
The Short-Intermediate Term Series may sell a security it does not own in
anticipation of a decline in the market value of the security (short sales). To
complete the transaction, the Series will borrow the security to make delivery
to the buyer. The Series is then obligated to replace the security borrowed by
purchasing it at the market price at the time of replacement. The price at such
time may be more or less than the price at which the security was sold by the
Series. Until the security is replaced, the Series is required to pay the lender
any interest which accrues during the period of the loan. To borrow the
security, the Series may be required to pay a premium which would increase the
cost of the security sold. The proceeds of the short sale will be retained by
the broker to the extent necessary to meet margin requirements until the short
position is closed out. Until the Series replaces the borrowed security, it will
(a) maintain in a segregated account cash or other liquid assets at such a level
that the amount deposited in the account plus the amount deposited with the
broker as collateral will equal the current market value of the security sold
short and will not be less than the market value of the security at the time it
was sold short, or (b) otherwise cover its short position.
The Series will incur a loss as a result of the short sales if the price of
the security increases between the date of the short sale and the date on which
the Series replaces the borrowed security. The Series will realize a gain if the
security declines in price between those dates. The result is the opposite of
what one would expect from a cash purchase of a long position in a security. The
amount of any gain will be decreased, and the amount of any loss will be
increased, by the amount of any premium or interest paid in connection with the
short sale. No more than 25% of the Series' net assets will be, when added
together: (i) deposited as collateral for the obligation to replace securities
borrowed to effect short sales and (ii) allocated to segregated accounts in
connection with short sales. The Series may also may make short sales
against-the-box without regard to this limitation. A short sale against-the-box
is a short sale in which the Series owns an equal amount of the 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. Under newly enacted legislation, a short sale against-the-box will
be treated as a sale for federal income tax purposes.
REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLLS
Reverse repurchase agreements involves sales by the Short-Intermediate Term
Series of assets concurrently with an agreement by the Series to repurchase the
same assets at a later date at a fixed price. During the reverse repurchase
agreement period, the Series continues to receive principal and interest
payments on these securities.
The Series may enter into dollar rolls in which the Series sells securities
for delivery in the current month and simultaneously contracts to repurchase
substantially similar (same type and coupon) securities on a specified future
date from the same party. During the roll period, the Series forgoes principal
and interest paid on securities. The Series is compensated by the difference
between the current sales price and the forward price for the future purchases
(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 or other liquid assets 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 the 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 termination 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 equivalent security position
which matures on or before the forward settlement date of the transaction.
B-16
<PAGE>
Reverse repurchase agreements and dollar rolls are considered borrowings by
the Series for purposes of the percentage limitation applicable to borrowings.
OTHER INVESTMENTS
Unless specified otherwise, each Series may invest in the following
investments:
REPURCHASE AGREEMENTS
The Money Market and Short-Intermediate Term Series each 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 resale price. The instruments held as collateral are valued
daily, and if the value of such instruments declines, the Series will require
additional collateral. The Series will enter into repurchase transactions only
with parties meeting creditworthiness standards approved by the Trustees. The
Series' 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 Series 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 Series will suffer a loss.
The Series participate in a joint repurchase account with other investment
companies managed by Prudential Investments Fund Management LLC (PIFM or the
Manager) pursuant to an order of the Securities and Exchange Commission (SEC).
On a daily basis, any uninvested cash balances of the Series 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.
SECURITIES LENDING
Consistent with applicable regulatory requirements, the Short-Intermediate
Term Series and Money Market Series may lend their portfolio securities to
brokers, dealers and other financial institutions, provided that such loans are
callable at any time by the Series and are at all times secured by cash or cash
equivalents, which are maintained in a segregated account pursuant to applicable
regulations that are equal to at least the market value, determined daily, of
the loaned securities. As a matter of fundamental policy, neither Series will
lend more than 30% of the value of their total assets. The advantage of such
loans is that the Series continue to receive the income on the loaned securities
while at the same time earning interest on the cash amounts deposited as
collateral, which will be invested in short-term obligations.
A loan may be terminated by the borrower on one business day's notice, or
by the Series on two business days' notice. If the borrower fails to deliver the
loaned securities within two days after receipt of notice, the Series could use
the collateral to replace the securities while holding the borrower liable for
any excess of replacement cost over collateral. As with any extensions of
credit, there are risks of delay in recovery and in some cases even loss of
rights in the collateral should the borrower of the securities fail financially.
However, these loans of portfolio securities will only be made to firms deemed
by the Series' investment adviser to be creditworthy and when the income which
can be earned from such loans justifies the attendant risks. Upon termination of
the loan, the borrower is required to return the securities to the Series. Any
gain or loss in the market price during the loan period would inure to the
Series. The creditworthiness of firms to which the Series lends their portfolio
securities will be monitored on an ongoing basis by the investment adviser
pursuant to procedures adopted and reviewed, on an ongoing basis, by the Board
of Trustees of the Trust.
When voting or consent rights which accompany loaned securities pass to the
borrower, the Series will follow the policy of calling the loaned securities, to
be delivered within one day after notice, to permit the exercise of such rights
if the matters involved would have a material effect on the Series' investment
in such loaned securities. The Series may pay reasonable finders',
administrative and custodial fees in connection with a loan of their securities
and may share the interest earned on collateral with the borrower.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES
Each Series may purchase or sell securities on a when-issued or delayed
delivery basis. When-issued or delayed delivery transactions arise when
securities are purchased or sold by the Series with payment and delivery taking
place 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
Series segregate cash, or other liquid assets having a value equal to or greater
than the Series' purchase commitments. The securities so purchased are subject
to maket fluctuation and no interest accrues to the purchaser during the period
between
B-17
<PAGE>
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.
ILLIQUID SECURITIES
The Trust may not hold more than 10% of the net assets of any Series (15%
in the case of the Short-Intermediate Term Series) in, illiquid securities,
including repurchase agreements which have a maturity of longer than seven days,
certain securities with legal or contractual restrictions on resale (restricted
securities) and securities that are not readily marketable. Repurchase
agreements subject to demand are deemed to have a maturity equal to the
applicable notice period.
Historically, illiquid securities have included securities subject to
contractual or legal restrictions on resale because they have not been
registered under the Securities Act of 1933, as amended (Securities Act),
securities which are otherwise not readily marketable and repurchase agreements
having a maturity of longer than seven days. Securities which have not been
registered under the Securities Act are referred to as private placements or
restricted securities and are purchased directly from the issuer or in the
secondary market. Mutual funds do not typically hold a significant amount of
these restricted or other illiquid securities because of the potential for
delays on resale and uncertainty in valuation. Limitations on resale may have an
adverse effect on the marketability of portfolio securities and a mutual fund
might be unable to dispose of restricted or other illiquid securities promptly
or at reasonable prices and might thereby experience difficulty satisfying
redemptions within seven days. A mutual fund might also have to register such
restricted securities in order to dispose of them resulting in additional
expense and delay. Adverse market conditions could impede such a public offering
of securities.
In recent years, however, a large institutional market has developed for
certain securities that are not registered under the Securities Act including
repurchase agreements, commercial paper, foreign securities, municipal
securities, convertible and corporate bonds and notes. Institutional investors
depend on an efficient institutional market in which the unregistered security
can be readily resold on an issuer's ability to honor a demand for repayment.
The fact that there are contractual or legal restrictions on resale to the
general public or to certain institutions may not be indicative of the liquidity
of such investments.
Rule 144A under the Securities Act allows for a broader institutional
trading market for securities otherwise subject to restriction on resale to the
general public. Rule 144A establishes a safe harbor from the registration
requirements of the Securities Act for resales of certain securities to
qualified institutional buyers. The investment adviser anticipates that the
market for certain restricted securities such as institutional commercial paper
and foreign securities will expand further as a result of this regulation and
the development of automated systems for the trading, clearance and settlement
of unregistered securities of domestic and foreign issuers, such as the PORTAL
System sponsored by the National Association of Securities Dealers, Inc. (NASD).
A Series' investment in Rule 144A securities could have the effect of increasing
illiquidity to the extent that qualified institutional buyers become, for a
time, uninterested in purchasing Rule 144A securities.
Restricted securities, including securities eligible for resale purchase to
Rule 144A under the Securities Act, and commercial paper that have a readily
available market are treated as liquid only when deemed liquid under procedures
established by the Trustees. The investment adviser will monitor the liquidity
of such restricted securities subject to the supervision of the Trustees. In
reaching liquidity decisions, the investment adviser will consider, among
others, the following factors: (1) the frequency of trades and quotes for the
security; (2) the number of dealers wishing to purchase or sell the security and
the number of other potential purchasers; (3) dealer undertakings to make a
market in the security; and (4) the nature of the security and the nature of the
marketplace (for example, the time needed to dispose of the security, the method
of soliciting offers and the mechanics of the transfer). With respect to
commercial paper that is issued in reliance on Section 4(2) of the Securities
Act, (1) it must be rated in one of the two highest rating categories by at
least two nationally recognized statistical rating organizations (NRSRO), or if
only one NRSRO rates the securities, by that NRSRO, or, if unrated, be of
comparable quality in the view of the investment adviser; and (2) it must not be
traded flat (that is, without accrued interest) or in default as to principal or
interest. Repurchase agreements subject to demand are deemed to have a maturity
equal to the notice period.
SEGREGATED ASSETS
When the Trust is required to segregate assets in connection with certain
hedging transactions, it will segregate cash or liquid assets. "Liquid assets"
means cash, U.S. Government securities, equity securities (including foreign
securities), debt obligations or liquid, unencumbered assets, marked-to-market
daily. Such hedging transactions may involve when-issued and delayed delivery
securities futures contracts written options and options on futures contracts
(unless otherwise covered). If collateralized or otherwise covered, in
accordance with Commission guidelines, these will not be deemed to be senior
securities.
(d) DEFENSIVE STRATEGY AND SHORT-TERM INVESTMENTS
When conditions dictate a temporary defensive strategy, the
Short-Intermediate Term Series may invest up to 100% of its assets in cash, U.S.
Government securities and high quality money market instruments, including
commercial paper of a U.S. or
B-18
<PAGE>
foreign company or foreign government, certificates of deposit, bankers
acceptances and time deposits of domestic and foreign banks; and obligations
issued or guaranteed by the U.S. Government, its agencies or instrumentalities.
These obligations will be U.S. dollar denominated. Commercial paper will be
rated, at the time of purchase, at least "A-Z" by S&P or "Prime-2" by Moody's or
if not rated, issued by an entity having an outstanding unsecured debt issue
rated at least "A" or "A-Z" by S&P or "A" or "Prime-2" by Moody's.
(e) PORTFOLIO TURNOVER
The Money Market Series and the U.S. Treasury Money Market Series intend
normally to hold their portfolio securities to maturity. The Money Market Series
and the U.S. Treasury Money Market Series do not normally expect to trade
portfolio securities although they may do so to take advantage of short-term
market movements. The Money Market Series and the U.S. Treasury Money Market
Series will make purchases and sales of portfolio securities with a government
securities dealer on a net price basis; brokerage commissions are not normally
charged on the purchase or sale of U.S. Treasury Securities. See "Portfolio
Transactions and Brokerage."
Although the Short-Intermediate Term Series has no fixed policy with
respect to portfolio turnover, it may sell portfolio securities without regard
to the length of time that they have been held in order to take advantage of new
investment opportunities or yield differentials, or because the
Short-Intermediate Term Series desires to preserve gains or limit losses due to
changing economic conditions. Accordingly, it is possible that the portfolio
turnover rate of the Short-Intermediate Term Series may reach, or even exceed,
250%. The portfolio turnover rate is computed by dividing the lesser of the
amount of the securities purchased or securities sold (excluding all securities
whose maturities at acquisition were one year or less) by the average monthly
value of such securities owned during the year. A 100% turnover rate would
occur, for example, if all of the securities held in the portfolio of the
Short-Intermediate Term Series were sold and replaced within one year. However,
when portfolio changes are deemed appropriate due to market or other conditions,
such turnover rate may be greater than anticipated. A higher rate of turnover
results in increased transaction costs to the Short-Intermediate Term Series.
The portfolio turnover rate for the Short-Intermediate Term Series for the
fiscal years ended November 30, 1997 and 1998 was 210% and % respectively.
INVESTMENT RESTRICTIONS
The Trust's fundamental policies as they affect a particular Series cannot
be changed without the approval of the outstanding shares of such Series by a
vote which is the lesser of (i) 67% or more of the voting securities of such
Series represented at a meeting at which more than 50% of the outstanding voting
securities of such Series are present in person or represented by proxy or (ii)
more than 50% of the outstanding voting securities of such Series. With respect
to the submission of a change in fundamental policy or investment objective to a
particular Series, such matters shall be deemed to have been effectively acted
upon with respect to all Series of the Trust if a majority of the outstanding
voting securities of the particular Series votes for the approval of such
matters as provided above, notwithstanding (1) that such matter has not been
approved by a majority of the outstanding voting securities of any other Series
affected by such matter and (2) that such matter has not been approved by a
majority of the outstanding voting securities of the Trust.
MONEY MARKET SERIES
The following investment restrictions are fundamental policies of the Trust
with respect to the Money Market Series of the Trust and may not be changed
except as described above.
The Trust may not:
1. Borrow money, except from banks for temporary or emergency purposes,
including the meeting of redemption requests which might otherwise require the
untimely disposition of securities; borrowing in the aggregate may not exceed
20%, and borrowing for purposes other than meeting redemptions may not exceed
5%, of the value of the Trust's total assets (including the amount borrowed),
less liabilities (not including the amount borrowed) at the time the borrowing
is made; investment securities will not be purchased while borrowings are
outstanding.
2. Pledge, hypothecate, mortgage or otherwise encumber its assets, except
in an amount up to 10% of the value of its net assets but only to secure
permitted borrowings of money.
3. Make loans to others, except through the purchase of the debt
obligations and the repurchase agreements covering government securities and the
lending of portfolio securities (limited to thirty percent of the Series' total
assets).
4. Purchase or sell real estate or real estate mortgage loans.
5. Purchase securities on margin or sell short.
6. Purchase or sell commodities or commodity futures contracts, or oil,
gas, or mineral exploration or development programs.
B-19
<PAGE>
7. Underwrite securities of other issuers.
8. Purchase the securities of any other investment company, except in
connection with a merger, consolidation, reorganization or acquisition of
assets.
9. Issue senior securities as defined in the Investment Company Act except
insofar as the Trust may be deemed to have issued a senior security by reason
of: (a) entering into any repurchase agreement; (b) permitted borrowings of
money; or (c) purchasing securities on a when-issued or delayed delivery basis.
10. Purchase securities on a when-issued basis if, as a result, more than
15% of the Trust's net assets would be committed.
SHORT-INTERMEDIATE TERM SERIES
The following investment restrictions are fundamental policies of the Trust
with respect to the Short-Intermediate Term Series of the Trust and may not be
changed except as described above.
The Trust may not:
1. Issue senior securities, borrow money or pledge its assets, except that
the Series may borrow from banks or through dollar rolls or reverse repurchase
agreements up to 331|M/3% of the value of its total assets (calculated when the
loan is made) for temporary, extraordinary or emergency purposes, to take
advantage of investment opportunities or for the clearance of transactions and
may pledge up to 331|M/3% of the value of its total assets to secure such
borrowings. For purposes of this restriction, the purchase or sale of securities
on a "when-issued" or delayed delivery basis, collateral arrangements with
respect to interest rate swap transactions reverse repurchase agreements or
dollar rolls or the purchase and sale of futures contracts are not deemed to be
a pledge of assets and neither such arrangements nor the purchase or sale of
futures contracts nor the purchase and sale of related options, nor obligations
of the Series to the Trustees of the Trust pursuant to deferred compensation
arrangements are deemed to be the issuance of a senior security.
2. Make loans to others, except through the purchase of the debt
obligations and the repurchase agreements covering government securities and the
lending of portfolio securities (limited to 30% of the Series' total assets).
3. Purchase or sell real estate or real estate mortgage loans, except that
the Series may purchase and sell mortgaged-backed securities, securities
collateralized by mortgages, securities which are secured by real estate,
securities of companies which invest or deal in real estate and publicly traded
securities of real estate investment trusts. The Series may not purchase
interests in real estate limited partnerships which are not readily marketable.
4. Purchase securities on margin (but the Series may obtain such short-term
credits as may be necessary for the clearance of transactions); provided that
the deposit or payment by the Series of initial or variation margin in
connection with options or futures contracts is not considered the purchase of a
security on margin.
5. Make short sales of securities, or maintain a short position if, when
added together, more than 25% of the value of the Series' net assets would be
(i) deposited as collateral for the obligation to replace securities borrowed to
effect short sales and (ii) allocated to segregated accounts in connection with
short sales. Short sales "against-the-box" are not subject to this limitation.
6. Purchase or sell commodities or commodity futures contracts, or oil,
gas, or mineral exploration or development programs, except that the Fund may
purchase and sell financial futures contracts and options thereon.
7. Purchase the securities of any other investment company, except in
connection with a merger, consolidation, reorganization or acquisition of
assets.
8. Purchase securities on a when-issued basis if, as a result, more than
15% of the Series' net assets would be committed.
U.S. TREASURY MONEY MARKET SERIES
In connection with its investment objective and policies as set forth in
the Prospectus, the U.S. Treasury Money Market Series has adopted the following
investment restrictions.
The U.S. Treasury Money Market Series may not:
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
B-20
<PAGE>
order of the Securities and Exchange Commission for temporary, extraordinary or
emergency purposes. The Series may pledge up to 20% of the value of its total
assets to secure such borrowings.
5. Buy or sell real estate or interests in real estate.
6. Act as underwriter except to the extent that, in connection with the
disposition of portfolio securities, it may be deemed to be an underwriter under
certain federal laws.
7. Make investments for the purpose of exercising control or management.
8. Invest in interests in oil, gas or other mineral exploration or
development programs.
9. Buy or sell commodities or commodity contracts (including futures
contracts and options thereon).
Whenever any fundamental investment policy or investment restriction states
a maximum percentage of any Series' assets, it is intended that if the
percentage limitation is met at the time the investment is made, a later change
in percentage resulting from changing total or net asset values will not be
considered a violation of such policy. However, in the event that a Series'
asset coverage for borrowings falls below 300%, the Series will take prompt
action to reduce its borrowings, as required by applicable law.
MANAGEMENT OF THE TRUST
<TABLE>
<CAPTION>
POSITION WITH PRINCIPAL OCCUPATIONS
NAME AND ADDRESS ** (AGE) TRUST DURING PAST 5 YEARS
- --------------------------- ---------------- -----------------------------------------------------------
<S> <C> <C>
Edward D. Beach (74) Trustee President and Director of BMC Fund, Inc., a closed-end
investment company; previously, Vice Chairman of
Broyhill Furniture Industries, Inc.; Certified Public
Accountant; Secretary and Treasurer of Broyhill Family
Foundation, Inc.; Member of the Board of Trustees of
Mars Hill College; Director of the High Yield Income
Fund, Inc.
Eugene C. Dorsey (72) Trustee Retired President, Chief Executive Officer and Trustee of
the Gannett Foundation (now Freedom Forum); former
Publisher of four Gannett newspapers and Vice
President of Gannett Company; past Chairman of
Independent Sector (national coalition of philanthropic
organizations); former Chairman of the American
Council for the Arts; Director of the Advisory Board of
Chase Manhattan Bank of Rochester, The High Yield
Income Fund Inc. and First Financial Fund, Inc.
Delayne Dedrick Gold (60) Trustee Marketing and Management Consultant., Director of The
High Yield Income Fund, Inc.
*Robert F. Gunia (52) Vice President Vice President (since September 1997), Prudential
and Trustee
Insurance Company of America (Prudential); Executive Vice
President and Treasurer (since December 1996), Prudential
Investments Fund Management LLC (PIFM); Senior Vice
President (since March 1987) of Prudential Securities
Incorporated (Prudential Securities) formerly Chief
Administrative Officer (July 1990-September 1996),
Director (January 1989-September 1996), Executive Vice
President, Treasurer and Chief Financial Officer (June
1987-December 1996) of Prudential Mutual Fund Management,
Inc.; Vice President and Director of The Asia Pacific
Fund, Inc. (since May 1989); Director of The High Yield
Income Fund, Inc.
</TABLE>
B-21
<PAGE>
<TABLE>
<CAPTION>
POSITION WITH PRINCIPAL OCCUPATIONS
NAME AND ADDRESS ** (AGE) TRUST DURING PAST 5 YEARS
- ----------------------------- -------------- ------------------------------------------------------------
<S> <C> <C>
*Mendel A. Melzer, CFA (38) Trustee Chief Investment Officer (since October 1996) of Prudential
751 Broad Street Mutual Funds; formerly Chief Financial Officer of
Newark, NJ Prudential Investments (November 1995-September 1996),
Senior Vice President and Chief Financial Officer of
Prudential Preferred Financial Services (April 1993-
November 1995), Managing Director of Prudential
Investment Advisors (April 1991-April 1993) and Senior
Vice President of Prudential Capital Corporation (July
1989-April 1991); Director of The High Yield Income Fund, Inc.
Thomas T. Mooney (57) Trustee President of the Greater Rochester Metro Chamber of
Commerce; formerly Rochester City Manager; Trustee of
Center for Governmental Research, Inc.; Director of
Monroe County Water Authority, Blue Cross of Rochester,
Executive Service Corps of Rochester, Monroe County
Industrial Development Corporation, Northeast Midwest
Institute; Director and Treasurer of First Financial
Fund, Inc., and The High Yield Plus Fund, Inc.; [Director
of The High Yield Income Fund, Inc.]
Thomas H. O'Brien (74) Trustee President of O'Brien Associates (Financial and
Management Consultants) (since April 1984); formerly
President of Jamaica Water Securities Corp. (holding
company) (February 1989-August 1990); Chairman of the
Board and Chief Executive Officer (September 1987-
February 1989) of Jamaica Water Supply Company and
Director (September 1987-August 1990); Director and
President of Winthrop Regional Health System and United
Presbyterian Home at Syoset Inc.; Director of Ridgewood
Savings Bank and the High Yield Income Fund, Inc.;
Trustee of Hofstra University.
Richard A. Redeker (55) Trustee Formerly President, Chief Executive Officer and Director
(October 1993-September 1996) of Prudential Mutual
Fund Management, Inc.; Executive Vice President,
Director and Member of Operating Committee (October
1993- September 1996), Prudential Securities; Director
(since October 1993-September 1996), Prudential
Securities Group, Inc.; Executive Vice President, The
Prudential Investment Corporation (since January 1994);
previously Senior Executive Vice President and Director
of Kemper Financial Services, Inc. (September
1978-September 1993); Director of The High Yield
Income Fund, Inc.
</TABLE>
B-22
<PAGE>
<TABLE>
<CAPTION>
POSITION WITH PRINCIPAL OCCUPATIONS
NAME AND ADDRESS ** (AGE) TRUST DURING PAST 5 YEARS
- --------------------------- --------------------- -----------------------------------------------------------
<S> <C> <C>
*Brian M. Storms (44) President and President, Prudential Investments (October 1998-present);
Trustee President of Prudential Mutual Funds, Annuities, and
Investment Management Services (September
1996-October 1998); Managing Director, Fidelity
Investment Institutional Services Company, Inc.
(July 1991-September 1996); President, J.K.
Schofield (October-1989-September 1991); Senior Vice
President, INVEST Financial Corporation (September
1982-October 1989); President and Director or
Trustee of funds within the Prudential Mutual Funds
Complex.
Nancy H. Teeters (68) Trustee Economist; formerly Vice President and Chief Economist
(March 1986-June 1990) of International Business
Machines Corporation; Director of Inland Steel
Industries (since July 1991) and The High Yield Income
Fund, Inc.
Louis A. Weil, III (57) Trustee Publisher and Chief Executive Officer (since January 1996)
and Director (since September 1991) of Central
Newspapers, Inc.; Chairman of the Board (since January
1996), Publisher and Chief Executive Officer (August
1991-December 1995) of Phoenix Newspapers, Inc.;
Director of Central Newspapers, Inc. (since September
1991); formerly, 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 High Yield Income Fund, Inc.
Grace C. Torres (39) Treasurer and First Vice President (since December 1996) of PIFM; First
Principal Financial Vice President (since March 1994) of Prudential
and Accounting Securities; formerly First Vice President (March 1994-
Officer September 1996) of Prudential Mutual Fund
Management, Inc. and Vice President (July 1989-
March 1994) of Bankers Trust Corporation.
Stephen M. Ungerman (45) Assistant Tax Director of Prudential Investments and the Private
Treasurer Asset Group of Prudential (since March 1996);
formerly First Vice President of Prudential Mutual
Fund Management, Inc. (February 1995-September
1996); prior thereto, Senior Tax Manager of Price
Waterhouse (1981-January 1993).
Deborah A. Docs (41) Secretary Vice President (since December 1996) of PIFM; Vice
President and Associate General Counsel of Prudential
Securities; formerly Vice President and Associate
General Counsel (June 1991-September 1996) of PIFM.
</TABLE>
- -----------
* "Interested" Trustee, as defined in the Investment Company Act, by reason of
his affiliation with Prudential Securities or PIFM.
** Unless otherwise noted the address of the Trustees and Officers is c/o:
Prudential Mutual Investments Management LLC, Gateway Center Three, 100
Mulberry Street, 9th Floor, Newark, New Jersey 07102-4077.
The Trust has Trustees who, in addition to overseeing the actions of the
Trust's Manager, Subadviser and Distributor, decide upon matters of general
policy. The Trustees also review the actions of the Trust's officers, who
conduct and supervise the daily business operations of the Trust.
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.
B-23
<PAGE>
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.
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 Trust pays each of its directors who is not an affiliated
person of the Manager or the Subadviser annual compensation of [$ ], in addition
to certain out-of-pocket expenses. The amount of annual compensation paid to
each Trustee may change as a result of the introduction of additional funds on
the boards of which the Trustees, will be asked to serve.
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 a Commission exemptive
order, at the daily rate of return of the Trust (the Trust Rate). Payment of the
interest so accrued is also deferred and accruals become payable at the option
of the Trustee. The Trust's obligation to make payments of deferred Trustees'
fees, together with interest thereon, is a general obligation of the Trust.
The Trustees have adopted a retirement policy which calls for the
retirement of Trustees on December 31 of the year in which they reach the age of
72, except that retirement is being phased in for Trustees who were age 68 or
older as of December 31, 1993. Under this phase-in provision, Messrs. Beach,
Dorsey and O'Brien are scheduled to retire on December 31, 1999.
The following table sets forth the aggregate compensation paid by the
Portfolio for the fiscal year ended November 30, 1998 to current Trustees of the
Trust. The table also shows aggregate compensation paid to those Trustees for
service on Boards of all funds managed by Prudential Investments Fund Management
LLC, including the Trust (Fund Complex), for the calendar year ended December
31, 1998.
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>
Edward D. Beach-Trustee $ None N/A $
Eugene C. Dorsey-Trustee** $ None N/A $
Delayne Dedrick Gold-Trustee $ None N/A $
Robert F. Gunia-Trustee and Vice President(1) - -
Mendel A. Melzer CFA-Trustee(1) - -
Thomas T. Mooney-Trustee** $ None N/A $
Thomas H. O'Brien-Trustee $ None N/A $
Richard A. Redeker-Trustee None N/A
Brian Storms-Trustee and President(1)
Nancy H. Teeters-Trustee $ None N/A $
Louis A. Weil, III-Trustee $ - - $
</TABLE>
- -----------
* Indicates number of funds/portfolios in Fund Complex (including the Trust)
to which aggregate compensation relates.
(1) Interested Trustees do not receive compensation from the Trust or any fund
in the Fund complex. Mr. Redeker is no longer an interested Trustee.
** Total compensation from all of the funds in the Fund complex for the calendar
year ended December 31, 1998, includes amounts deferred at the election of
Trustees under the Trust's deferred compensation plan. Including accrued
interest, total compensation amounted to $ and $ for Dorsey and Mooney,
respectively.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
Trustees of the Trust are eligible to purchase Class Z shares of the Trust
which are sold without either an initial sales charge or CDSC to a limited group
of investors.
As of , 1999, the Trustees and officers of the Trust, as a group,
owned less than 1% of the outstanding shares of beneficial interest of each
class of the Money Market Series, U.S. Treasury Money Market Series and the
Short-Intermediate Term Series of the Trust.
B-24
<PAGE>
As of , 1999, Prudential Securities was the record holder for other
beneficial owners of [7,586,833] Short-Intermediate Term Series Class A Shares
(or [52%] of such shares outstanding), and NO Short-Intermediate Term Series
Class Z Shares (or 0% of such shares outstanding), [381,944,248] Money Market
Series Class A Shares (or [56%] of such shares outstanding), and NO Money Market
Series Class Z Shares (or [0%] of such shares outstanding) and [628,240,468]
U.S. Treasury Money Market Series Class A Shares (or [86%] of such shares
outstanding) and NO U.S. Treasury Money Market Series Class Z Shares (or [0%] 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.
As of , 1999, the beneficial owners, directly or indirectly, of more than
5% of the outstanding shares of any class of beneficial interest were:
[Prudential Trust Company, FBO-PRU-Clients, Attn: John Sturdy, 30 Scranton
Office Park, Moosic PA, 18507-1796, who held 1,650 Class Z shares of the
Short-Term Intermediate Series (98%); Pru Defined Contributions SVCS, FBO
PRU-NON-Trust Accounts, Attn: John Sturdy, 30 Scranton Office Park, Moosic, PA
18507-1755, who held 569,367 Class Z shares of the Money Market Series (99%);
and Prudential Audit Acct, P.O. Box 15025, New Brunswick NJ, 08906-5025, who
held 205 Class Z shares of the U.S. Treasury Money Market Series (99%).]
INVESTMENT ADVISORY AND OTHER SERVICES
(A) MANAGER AND INVESTMENT ADVISER
The Manager of the Trust is Prudential Investments Fund Management LLC
(PIFM or the Manager), Gateway Center Three, 100 Mulberry Street, Newark, New
Jersey 07102-4077. PIFM serves as manager of all of the investment companies
that, together with the Trust, comprise the Prudential Mutual Funds. See "How
the Series is Managed-Manager" in the Prospectus of each Series. As of December
31, 1998, PIFM managed and/or administered open-end and closed-end management
investment companies with assets of approximately $70.5 billion. According to
the Investment Company Institute, as of November 30, 1998, the Prudential Mutual
Funds were the 18th largest family of mutual funds in the United States.
PIFM is a subsidiary of Prudential Securities and The Prudential Insurance
Company of America (Prudential). Prudential Mutual Fund Services LLC (PMFS or
the Transfer Agent) serves as the transfer agent for the Prudential Mutual Funds
and, in addition, provides customer service, recordkeeping and management and
administration services to qualified plans.
Pursuant to a management agreement with the Trust (the Management
Agreement), PIFM, 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. PIFM is
obligated to keep certain books and records of the Trust in connection
therewith. PIFM 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 PIFM to the Trust are not
exclusive under the terms of the Management Agreement and PIFM is free to, and
does, render management services to others.
PIFM 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 PIFM under the Management
Agreement may be furnished by any such directors, officers or employees of PIFM.
In connection with the services it renders, PIFM bears the following expenses:
(a) the salaries and expenses of all personnel of the Trust and the
Manager, except the fees and expenses of Trustees who are not affiliated persons
of the Manager or the Trust's investment adviser;
(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, doing business as Prudential Investments (PI, the Subadviser or the
investment adviser), pursuant to a subadvisory agreement between PIFM and PI
(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 the
Manager or the Trust's investment adviser, (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
B-25
<PAGE>
with the Commission 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 PIFM for the services performed and the facilities
furnished by PIFM, computed daily and payable monthly, at an annual rate of .40
of 1% of the Short-Intermediate Term Series' and the U.S. Treasury Money Market
Series' average daily net assets and at an annual rate of .40 of 1% of the
average daily net assets up to $1 billion, .375 of 1% on assets between $1
billion and $1.5 billion and .35 of 1% on assets in excess of $1.5 billion of
the average daily net assets of the Money Market Series. The Management
Agreement also provides that in the event the expenses of a Series (including
the fees of the Manager but excluding interest, taxes, brokerage commissions,
distribution fees, litigation and indemnification expenses and other
extraordinary expenses) for any fiscal year exceed the lowest applicable annual
expense limitation established and enforced pursuant to the statute or
regulations of any jurisdictions in which shares of the Series are then
qualified for offer and sale, PIFM will reduce its fee by the amount of such
excess. Reductions in excess of the total compensation payable to PIFM will be
paid by PIFM 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 21|M/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 11|M/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 8,
1996 and by a majority of the outstanding shares of the Money Market Series and
the Short-Intermediate Term Series on April 28, 1988 and a majority of the
outstanding shares of the U.S. Treasury Money Market Series on November 26,
1991.
For the fiscal year ended November 30, 1998, the Trust paid management fees
to PIFM of $________, $_______ and $_______ relating to the Money Market Series,
Short-Intermediate Term Series and U.S. Treasury Money Market Series. For the
fiscal year ended November 30, 1997, the Trust paid management fees to PIFM of
$2,348,740, $666,606 and $1,610,536 relating to the Money Market Series,
Short-Intermediate Term Series and U.S. Treasury Money Market Series,
respectively. For the fiscal year ended November 30, 1996, the Trust paid
management fees to PIFM of $2,362,419, $810,455 and $1,572,239 relating to the
Money Market Series, Short-Intermediate Term Series and U.S. Treasury Money
Market Series, respectively. PIFM may from time to time waive all or a portion
of its management fee and subsidize all or a portion of the operating expenses
of the Trust. Fee waivers and subsidies will increase the Trust's total return.
These voluntary waivers may be terminated at any time without notice.
PIFM has entered into the Subadvisory Agreement with PI. The Subadvisory
Agreement provides that PI furnish investment advisory services in connection
with the management of the Trust. In connection therewith, PI is obligated to
keep certain books and records of the Trust. PIFM continues to have
responsibility for all investment advisory services pursuant to the Management
Agreement and supervises PI's performance of those services. PI is reimbursed by
PIFM for the reasonable costs and expenses incurred by PI in furnishing those
services. Investment advisory services are provided to the Trust by a unit of
the Subadviser known as Prudential Mutual Fund Investment Management.
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 22, 1997, and by the shareholders of each of the Money
Market Series and the Short-Intermediate Term Series on April 28, 1988 and the
shareholders of the U.S. Treasury Money Market Series on November 26, 1991.
The Subadvisory Agreement provides that it will terminate in the event of
its assignment or upon the termination of the Management Agreement. The
Subadvisory Agreement may be terminated by the Trust, PIFM or PI 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.
(B) PRINCIPAL UNDERWRITER, DISTRIBUTOR AND RULE 12B-1 PLANS
Prudential Investment Management Services LLC (PIMS or the Distributor),
Gateway Center Three, 100 Mulberry Street, Newark, New Jersey 07102-4077, acts
as distributor for the Trust's shares. Prior to June 1, 1998, Prudential
Securities Incorporated (Prudential Securities) was the company's distributor.
PIMS and Prudential Securities are subsidiaries of Prudential.
B-26
<PAGE>
CLASS A PLAN. Under the Class A Plan for the Money Market Series and the
U.S. Treasury Money Market Series, the Trust may pay the Distributor for its
distribution-related activities with respect to Class A shares of each Series at
an annual rate of up to .125 of 1% of the average daily net assets of each
Series' Class A shares. Under the Class A Plan for the Short-Intermediate
Series, the Trust may pay the Distributor for its distribution-related
activities with respect to Class A shares of the Series' Class A shares at the
annual rate of the lesser of (a) .25 of 1% per annum of the aggregate sales of
the Series' Class A 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 Short-Intermediate Term Series Class A
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' Class A
shares issued after the effective date of the Class A Plan.
During the fiscal year ended November 30, 1998, the Distributor and
Prudential Securities incurred distribution expenses in the aggregate of
[$733,142] and [$503,292] 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 the Distributor and Prudential
Securities. It is estimated that of these amounts approximately [$528,800]
[(79.5%)] and [$395,100 (78.5%)] 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 [$150,300 (20.5%)] and [$108.200 (21.5%)] 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 the Distributor's 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 stationary 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, 1998, the Distributor and Prudential
Securities received [$329,158] from the Short-Intermediate Term Series under the
Plan all of which was spent on behalf of the Short-Intermediate Term Series or
the payment of account servicing fees to
financial advisers.
In each Distribution and Service Agreement, the Trust has agreed to
indemnify PIMS to the extent permitted by applicable law against certain
liabilities under the Securities Act.
In addition to distribution and service fees paid by the Fund under the
Class A Plans, the Manager (or one of its affiliates) may make payments to
dealers (including Prudential Securities) and other persons which distribute
shares of each Series, including Class Z shares. Such payments may be calculated
by reference to the net asset values of shares sold by such persons or
otherwise.
Pursuant to the Plans, the Trustees are provided at least quarterly with
written reports of the amounts expended under the Plans and the purposes for
which such expenditures were made. The Trustees review such reports on a
quarterly basis.
The Plans provide that they will continue in effect from year to year,
provided each such continuance is approved annually by a vote of the Trustees in
the manner described above. The Plans may not be amended to increase materially
the amount to be spent for the services described therein without approval of
the shareholders of the applicable Series, and all material amendments of the
Plans must also be approved by the Trustees in the manner described above. Each
Plan may be terminated at any time, without payment of any penalty, by vote of a
majority of the Rule 12b-1 Trustees, or by a vote of a majority of the
outstanding voting securities of the applicable Series (as defined in the
Investment Company Act). Each Plan will automatically terminate in the event of
its assignment (as defined in the Investment Company Act).
So long as the Plans are in effect, the selection and nomination of
Trustees who are not interested persons of the Trust shall be committed to the
discretion of the Trustees who are not interested persons. The Trustees have
determined that, in their judgment, there is a reasonable likelihood that the
Plans will benefit the Trust and its shareholders. In the Trustees' quarterly
review of the Plans, they consider the continued appropriateness and the level
of payments provided therein.
FEE WAIVERS/SUBSIDIES
PIFM may from time to time waive all or a portion of its management fee and
subsidize all or a portion of the operating expenses of the Fund. These
voluntary waivers may be terminated at any time without notice. Fee waivers and
subsidies will increase the Fund's total return.
NASD MAXIMUM SALES CHARGE RULE. Pursuant to rules of the NASD, the
Distributor is required to limit aggregate initial sales charges, deferred sales
charges and asset-backed sales charges to 6.25% of total gross sales of each
class of shares. Interest charges on unreimbursed distribution expenses equal to
the prime rate plus one percent per annum may be added to the 6.25% limitation.
Sales from the reinvestment of dividends and distributions are not included in
the calculation of the 6.25% limitation. The annual asset-based sales charge on
shares of the Fund may not exceed .75 of 1% per class. The 6.25% limitation
applies to
B-27
<PAGE>
each class of the Fund rather than on a per shareholder basis. If aggregate
sales charges were to exceed 6.25% of total gross sales of any class, all sales
charges on shares of that class would be suspended.
(C) OTHER SERVICE PROVIDERS
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. Subcustodians provide custodial
services for the Fund's foreign assets held outside the United States.
Prudential Mutual Fund Services LLC (PMFS), Raritan Plaza One, Edison, New
Jersey 08837, serves as the transfer and dividend disbursing agent of the Fund.
PMFS is a wholly-owned subsidiary of PIFM. 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, the payment of dividends and distributions and
related functions. For these services, PMFS receives an annual maintenance fee
of $12.00 per shareholder account, a new account set-up fee $2.00 for each
manually established shareholder account and a monthly inactive zero balance
account fee of $.20 per shareholder account. PMFS is also reimbursed for its
out-of-pocket expenses, including but not limited to postage, stationery,
printing, allocable communication expenses and other costs.
[ ] serves as the Trust's independent accountants and in that capacity
audits the Trust's annual financial statements.
BROKERAGE ALLOCATION AND OTHER PRACTICES
The Manager is responsible for decisions to buy and sell securities for the
Money Market Series, Short-Intermediate Term Series and U.S. Treasury Money
Market Series, arranging the execution of portfolio security transactions on
each Series' behalf, and the selection of brokers and dealers to effect the
transactions. Purchases of portfolio securities are made from dealers,
underwriters and issuers; sales, if any, prior to maturity, are made to dealers
and issuers. Each Series does not normally incur any brokerage commission
expense on such transactions. The instruments purchased by the Series are
generally traded on a "net" basis with dealers acting as principal for their own
accounts without a stated commission, although the price of the security usually
includes a profit to the dealer. Securities purchased in underwritten offerings
include a fixed amount of compensation to the underwriter, generally referred to
as the underwriter's concession or discount. When securities are purchased or
sold directly from or to an issuer, no commissions or discounts are paid.
The policy of each of the Series regarding purchases and sales of
securities is that primary consideration will be given to obtaining the most
favorable price and efficient execution of transactions.
The Trust paid no brokerage commissions for the fiscal years ended November
30, 1996, 1997 and 1998.
CAPITAL SHARES, OTHER SECURITIES AND ORGANIZATION
THE TRUST, ORGANIZED IN 1981 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 separated series and classes within such
securities. Each Series is authorized to issue an unlimited number of shares,
divided into two classes, designated Class A and Class Z.
The shareholders of the Money Market Series, the Short-Intermediate Term
Series and the U.S. Treasury Money Market Series are each entitled to a full
vote for each full share of beneficial interest (par value $.01 per share) held
(and fractional votes for fractional shares). Shares of each Series are entitled
to vote as a class only to the extent required by the provisions of the
Investment Company Act or as otherwise permitted by the Trustees in their sole
discretion. Under the Investment Company Act, shareholders of each Series have
to approve the adoption of any investment advisory agreement relating to such
series and of any changes in investment policies related thereto.
Shares of each Series are currently divided into two classes designated
Class A and Class Z shares. Each class represents an interest in the same assets
of the Series and is identical in all respects except that (i) each class is
subject to different expenses which may affect performance, (ii) each class has
exclusive voting rights on any matter submitted to shareholders that relates
solely to its arrangement and has separate voting rights on any manner submitted
to shareholders in which the interests of one class differ from the interests of
the other class, (iii) each class has a different exchange privilege and (iv)
Class Z shares are offered exclusively for sale to a limited group of investors.
Since Class A shares are subject to distribution and/or service expenses, the
liquidation proceeds to shareholders of that class are likely to be lower than
to Class Z shareholders whose shares are not subject to any distribution and/or
service expenses. In accordance with the Trust's Declaration of Trust, the
Trustees may authorize the creation of additional classes, with such
preferences, privileges, limitations and voting and dividend rights as the
Trustee may determine.
B-28
<PAGE>
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.
PURCHASE, REDEMPTION AND PRICING OF TRUST SHARES
Shares of the Trust may be purchased at a price equal to the next
determined net asset value (NAV) per share. Class Z shares of the Fund are
offered to a limited group of investors at NAV without any sales charge.
PURCHASES BY WIRE. For an initial purchase of shares of the Trust by wire,
you must complete an application and telephone PMFS at (800) 225-1852
(toll-free) to receive an account number. The following information will be
requested: your name, address, tax identification number, class election ,
dividend distribution election, amount being wired and wiring bank. Instructions
should then be given by you to your bank to transfer funds by wire to State
Street Bank and Trust Company (State Street), Boston, Massachusetts, Custody and
Shareholder Services Division, Attention: Prudential Government Securities
Trust, specifying on the wire the account number assigned by PMFS and your name
and identifying the Series and the class in which you are eligible to invest
(Class A or Class Z shares).
If you arrange for receipt by State Street of Federal Funds prior to the
calculation of NAV (4:15 P.M., New York time for the Short-Intermediate Term
Series; 4:30 P.M. New York time for the Money Market Series and U.S. Treasury
Money Market Series), on a business day, you may purchase shares of the Fund as
of that day.
In making a subsequent purchase order by wire, you should wire State Street
directly and should be sure that the wire specifies Prudential Government
Securities Trust-(specify the Series), Class A or Class Z shares and your name
and individual account number. It is not necessary to call PMFS to make
subsequent purchase orders utilizing Federal Funds. The minimum account which
may be invested by wire is $1,000.
In order to exchange shares by telephone, you must authorize telephone
exchanges on your initial application form or by written notice to the Transfer
Agent and hold shares in non-certificate form. Thereafter, you may call the
Trust at (800) 225-1852 to execute .a telephone exchange of shares, on weekdays,
except holidays, between the hours of 8:00 A.M. and 6:00 P.M., New York time.
For your protection and to prevent fraudulent exchanges, your telephone call
will be recorded and you will be asked to provide your personal identification
number. A written confirmation of the exchange transaction will be sent to you.
Neither the Trust nor its agents will be liable for any loss, liability or cost
which results from acting upon instructions reasonably believed to be genuine
under the foregoing procedures. All exchanges will be made on the basis of the
relative NAV of the two funds next determined after the request is received in
good order.
If you hold shares through Prudential Securities, you must exchange your
shares by contacting your Prudential Securities financial 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.
You may also exchange shares by mail by writing to Prudential Mutual Fund
Services LLC, Attention: Exchange Processing, P.O. Box 15010, New Brunswick,
New Jersey 08906-5010.
ISSUANCE OF TRUST SHARES FOR SECURITIES
Transactions involving the issuance of Trust shares for securities (rather
than cash) will be limited to (i) reorganizations, (ii) statutory mergers, or
(iii) other acquisitions of portfolio securities that: (a) meet the investment
objectives and policies of the Trust, (b) are liquid and not subject to
restrictions on resale, (c) have a value that is readily ascertainable via a
listing on or trading in a recognized United States or international exchange or
market, and (d) are approved by the Trust's investment adviser.
CLASS Z SHARES
Class Z shares of the Trust currently are available for purchase by the
following categories of investors:
o pension, profit-sharing or other employee benefits plans qualified under
Section 401 of the Internal Revenue Code, deferred compensation and
annuity plans under Sections 457 and 403(b)(7) of the Internal Revenue
Code and non-qualified plans for which the Trust is an available option
(collectively, Benefits Plans), provided such Benefit Plans (in
combination with other plans sponsored by the same employer or group of
related employers) have at least $50 million in defined contribution
assets;
o participants in any fee-based program or trust program sponsored by an
affiliate of the Distributor which includes mutual funds as investment
options and for which the Trust is an available option;
B-29
<PAGE>
o certain participants in the MEDLEY Program (group variable annuity
contracts) sponsored by Prudential for whom Class Z shares of the
Prudential Mutual Funds are an available investment option;
o Benefits Plans for which an affiliate of the Distributor provides
administrative or recordkeeping services and as of September 20, 1996, (a)
were Class Z shareholders of the Prudential Mutual Funds or (b) executed a
letter of intent to purchase Class Z shares of the Prudential Mutual
Funds:
o the Prudential Securities Cash Balance Pension Plan, an employee defined
benefit plan sponsored by Prudential Securities;
o current and former Directors/Trustees of the Prudential Mutual Funds
(including the Trust);
o employees of Prudential and/or Prudential Securities who participate in a
Prudential-sponsored employee savings plan and
o Prudential with an investment of $10 million or more.
After a Benefit Plan qualifies to purchase Class Z shares, all subsequent
purchases will be for Class Z shares.
In connection with the sale of Class Z shares, the Manager, the Distributor
or one of their affiliates may pay dealers, financial advisers and other persons
which distribute shares a finders fee, from its own resources, based on a
percentage of the NAV of shares sold by such persons.
Class Z shares of the Trust may also be purchased by certain savings,
retirement and deferred compensation plans, qualified or non-qualified under the
Internal Revenue Code of 1986, as amended (the Internal Revenue Code), provided
that (1) the plan purchases shares of the Trust pursuant to an investment
management agreement with the Prudential Insurance Company of America or its
affiliates, (2) the Trust is an available investment option under the agreement
and (3) the plan will participate in the PruArray and SmartPath Programs
(benefit plan recordkeeping service) sponsored by PMFS. These plans include
pension, profit-sharing, stock-bonus or other employee benefit plans under
Section 401 of the Internal Revenue Code and deferred compensation and annuity
plans under Sections 457 or 403 (b)(7) of the Internal Revenue Code.
SALE OF SHARES
You can redeem shares at any time for cash at the NAV next determined after
the redemption request is received in proper form (in accordance with procedures
established by the Transfer Agent in connection with investors' accounts) by the
Transfer Agent, the Distributor or your broker. If you are redeeming your shares
through a broker, your broker must receive your sell order before the Trust
computes its NAV for that day (that is, 4:15 P.M., New York time for
Short-Intermediate Term Series or 4:30 P.M., New York time for Money Market
Series and U.S. Treasury Money Market Series) in order to receive that day's
NAV. Your broker will be responsible for furnishing all necessary documentation
to the Distributor and may charge you for its services in connection with
redeeming shares of the Fund.
If you hold shares of the Trust through Prudential Securities, you must
redeem your shares through Prudential Securities. Please contact your
Prudential-Securities financial adviser.
If you hold shares in non-certificate form, a written request for
redemption signed by you exactly as the account is registered is required. If
you hold certificates, the certificates, signed in the name(s) shown on the face
of the certificates, must be received by the Transfer Agent, the Distributor or
your broker 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 Trust in care of its Transfer Agent,
Prudential Mutual Fund Services LLC, Attention: Redemption Services, P.O. Box
15010, New Brunswick, New Jersey 08906-5010, the Distributor or to your broker.
SIGNATURE GUARANTEE. If the proceeds of the redemption (1) exceed $50,000,
(2) are to be paid to a person other that the record owner, (3) are to be sent
to an address other than the address on the Transfer Agent's records, or (4) are
to be paid to a corporation, partnership, trust or fiduciary, the signature(s)
on the redemption request and on the certificates, if any, or stock power must
be guaranteed by an "eligible guarantor institution." An "eligible guarantor
institution" includes any bank, broker, dealer or credit union. The Transfer
Agent reserves the right to request additional information from, and make
reasonable inquiries of, any eligible guarantor institution. For clients of
Prusec, a signature guarantee may be obtained from the agency or office manager
of most Prudential Insurance and Financial Services or Preferred Services
offices. In the case of redemptions from a PruArray Plan, if the proceeds of the
redemption are invested in another investment option of the plan in the name of
the record holder and at the same address as reflected in the Transfer Agent's
records, a signature guarantee is not required.
Payment for shares presented for redemption will be made by check within
seven days after receipt by the Transfer Agent, the Distributor or your broker
of the certificate and/or written request, except as indicated below. If you
hold shares through a broker, payment for shares presented for redemption will
be credited to your account at your broker, unless you indicate otherwise. Such
payment may be postponed or the right of redemption suspended at times (1) when
the New York Stock Exchange is closed for other than customary weekends and
holidays. (2) when trading on such Exchange is restricted, (3) when an emergency
exists as
B-30
<PAGE>
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 (4) during any other period when
the Commission, by order, so permits; provided that applicable rules and
regulations of the Commission shall govern as to whether the conditions
prescribed in (2), (3), or (4) 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, which may take up to 10 calendar days from the time of receipt of
the purchase check by the Transfer Agent. Such delay may be avoided by
purchasing shares by wire or by certified or cashier's check.
REDEMPTION IN KIND. If the Trustees determine that it would be detrimental
to the best interests of the remaining shareholders of the Trust to make payment
wholly or partly in cash, the Trust may pay the redemption price in whole or in
part by a distribution in kind of securities from the investment portfolio the
Trust, in lieu of cash, in conformity with applicable rules of the Commission.
Securities will be readily marketable and will be valued in the same manner as
in a regular redemption. If your shares are redeemed in kind, you would incur
transaction costs in converting the assets into cash. The Trust, however, has
elected to be governed by Rule 18f-1 under the Investment Company Act, under
which the Trust is obligated to redeem shares solely in cash up to the lesser of
$250,000 or 1% of the NAV of the Fund during any 90-day period for any one
shareholder.
INVOLUNTARY REDEMPTION. In order to reduce expenses of the Trust, the
Trustees 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 NAV of less than $500 due to a redemption. The Trust will give such
shareholders 60 days' prior written notice in which to purchase sufficient
additional shares to avoid such redemption. No contingent deferred sales charge
will be imposed on any such involuntary redemption.
90-DAY REPURCHASE PRIVILEGE. After you redeem your shares, you have a
90-day period during which you may reinvest any of the redemption proceeds in
shares of the same Series without paying an initial sales charge. In order to
take advantage of this one-time privilege, you must notify the Transfer Agent or
your broker at the time of the repurchase. Exercise of the exchange privilege
may affect federal tax treatment of any gain realized redemption.
SHAREHOLDER INVESTMENT ACCOUNT
Upon the initial purchase of shares of the Trust, a Shareholder Investment
Account is established for each investor under which shares are held for the
investor by the Transfer Agent. 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.The Trust makes available
to the shareholders the following privileges and plans. If a stock certificate
is desired, it must be requested in writing for each transaction. Certificates
are issued only for full shares and may be redeposited in the Account at any
time. There is no charge to the investor for issuance of a certificate. The
Trust makes available to the Shareholders the following privileges and plans.
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 LLC (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 broker. Any
shareholder who receives a cash payment representing a dividend or distribution
may reinvest such dividend
B-31
<PAGE>
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 NAV per share next determined after receipt of the check or proceeds
by the Transfer Agent.
EXCHANGE PRIVILEGE
The Trust makes available to its Money Market Series, Short-Intermediate
Term Series and U.S. Treasury Money Market Series shareholders the privilege of
exchanging their shares for shares of either of the other Series and certain
other Prudential Mutual Funds, including one or more specified money market
funds, subject in each case to the minimum investment requirements of such
funds. Class A or Class Z shares of such other Prudential Mutual Funds may also
be exchanged for Class A or Class Z shares of the Money Market Series and for
shares of the Short-Intermediate Term Series and U.S. Treasury Money Market
Series. An exchange is treated as a redemption and purchase for Federal income
tax purposes. All exchanges are made on the basis of relative NAV next
determined after receipt of an order in proper form. An exchange will be treated
as a redemption and purchase for tax purposes. Shares may be exchanged for
shares of another fund only if shares of such fund may legally be sold under
applicable state laws.
It is contemplated that the exchange privilege may be applicable to new
mutual funds whose shares may be distributed by the Distributor.
Additional details about the Exchange Privilege and prospectuses for each
of the Prudential Mutual Funds are available from the Trust's Transfer Agent,
the Distributor or your broker. 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.
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 LLC, at the address noted above.
CLASS A. Shareholders of the Trust may exchange their Class A shares for
Class A shares of the Prudential Mutual Funds, and shares of the money market
funds specified below. No fee or sales load will be imposed upon the exchange.
The following money market funds participate in the Class A Exchange Privilege:
Prudential California Municipal Fund
(California Money Market Series)
Prudential Government Securities Trust
(Money Market Series)
(U.S. Treasury Money Market Series)
Prudential Municipal Series Fund
(Connecticut Money Market Series)
(Massachusetts Money Market Series)
(New York Money Market Series)
(New Jersey Money Market Series)
Prudential MoneyMart Assets
Prudential Tax-Free Money Fund, Inc.
Shareholders of the Trust may not exchange their shares for Class B or
Class C shares of the Prudential Mutual Funds or shares of Prudential Special
Money Market Fund, a money market fund, except that shares acquired prior to
January 22, 1990 subject to a contingent deferred sales charge can be exchanged
for Class B shares.
CLASS Z. Class Z shares may be exchanged for Class Z shares of other
Prudential Mutual Funds.
DOLLAR COST AVERAGING-SHORT-INTERMEDIATE TERM SERIES
Dollar cost averaging is a method of accumulating shares by investing a
fixed amount of dollars in shares at set intervals. An investor buys more shares
when the price is low and fewer shares when the price is high. The overall cost
is lower than it would be if a constant number of shares were bought at set
intervals.
Dollar cost averaging may be used, for example, to plan for retirement, to
save for a major expenditure, such as the purchase of a home, or to finance a
college education. The cost of a year's education at a four-year college today
averages around $14,000 at a private college and around $6,000 at a public
university. Assuming these costs increase at a rate of 7% a year, as has been
projected, for the freshman class beginning in 2011, the cost of four years at a
private college could reach $210,000 and over $90,000 at a public university.1
B-32
<PAGE>
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 Investment Plan."
- -----------
1 Source information concerning the costs of education at public and private
universities is available from The College Board Annual Survey of Colleges,
1993. Average costs for private institutions include tuition, fees, room and
board for the 1993-94 academic year. 2 The chart assumes an effective rate of
return of 8% (assuming monthly compounding). This example is for illustrative
purposes only and is not intended to reflect the performance of an investment in
shares of the Fund. The investment return and principal value of an investment
will fluctuate so that an investor's shares when redeemed may be worth more or
less than their original cost.
AUTOMATIC INVESTMENT PLAN (AIP)
Under AIP, 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 brokerage account (including a Prudential Securities 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 AIP participants.
Further information about this program and an application form can be
obtained from the Transfer Agent, the Distributor or your broker.
SYSTEMATIC WITHDRAWAL PLAN
A systematic withdrawal plan is available for shareholders having shares of
the Trust held through the Transfer Agent, the Distributor or your broker. 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 NAV on shares held under this plan. See "Shareholder
Investment Account-Automatic Reinvestment of Dividends and Distributions" above.
The Transfer Agent, the Distributor or your broker acts as an agent 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-deferred accounts" under
Section 403(b)(7) of the Internal Revenue Code are available through the
Distributor. These plans are for use by both self-employed individuals and
corporate employers. These plans permit either self-direction of accounts by
participants, or a pooled account arrangement. Information regarding the
establishment of these plans, the administration, custodial fees and other
details are available from the Distributor 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
B-33
<PAGE>
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 COMPOUNDING1
<TABLE>
<CAPTION>
CONTRIBUTIONS PERSONAL
MADE OVER: SAVINGS IRA
- --------------- ---------- ----------
<S> <C> <C>
10 years $ 26,165 $ 31,291
15 years 44,675 58,649
20 years 68,109 98,846
25 years 97,780 157,909
30 years 135,346 244,692
</TABLE>
- -----------
1 The chart is for illustrative purposes only and does not represent the
performance of the Fund or any specific investment. It shows taxable versus
tax-deferred compounding for the periods and on the terms indicated. Earnings in
a traditional IRA account will be subject to tax when withdrawn from the
account. Distributions from a Roth IRA which meet the conditions required under
the Internal Revenue Code will not be subject to tax upon withdrawal from the
account.
MUTUAL FUND PROGRAMS
From time to time, a Series of the Fund may be included in a mutual fund
program with other Prudential Mutual Funds. Under such a program, a group of
portfolios will be selected and thereafter promoted collectively. Typically,
these programs are created with an investment theme, such as, to seek greater
diversification, protection from interest rate movements or access to different
management styles. In the event such a program is instituted, there may be a
minimum investment requirement for the program as a whole. A Series may waive or
reduce the minimum initial investment requirements in connection with such a
program.
The mutual funds in the program may be purchased individually or as a part
of the program. Since the allocation of portfolios included in the program may
not be appropriate for all investors, investors should consult their financial
adviser concerning the appropriate blend of portfolios for them. If investors
elect to purchase the individual mutual funds that constitute the program in an
investment ratio different from that offered by the program, the standard
minimum investment requirements for the individual mutual funds will apply.
NET ASSET VALUE
MONEY MARKET SERIES AND U.S. TREASURY MONEY MARKET SERIES
AMORTIZED COST VALUATION. The Money Market Series and the U.S. Treasury
Money Market Series use the amortized cost method to determine the value of
their portfolio securities in accordance with regulations of the Securities and
Exchange Commission. The amortized cost method involves valuing a security at
its cost and amortizing any discount or premium over the period until maturity.
The method does not take into account unrealized capital gains and losses which
may result from the effect of fluctuating interest rates on the market value of
the security.
With respect to the Money Market Series and the U.S. Treasury Money Market
Series, the Trustees have determined to maintain a dollar-weighted average
maturity of 90 days or less, to purchase instruments having remaining maturities
of thirteen months or less and to invest only in securities determined by the
investment adviser under the supervision of the Trustees to present minimal
credit risks and to be of eligible quality in accordance with the provisions of
Rule 2a-7 of the Investment Company Act. The Trustees have adopted procedures
designed to stabilize, to the extent reasonably possible, both Series' price per
share as computed for the purpose of sales and redemptions at $1.00. Such
procedures will include review of the Series' portfolio holdings by the
Trustees, at such intervals as they may deem appropriate, to determine whether
the Series' net asset value calculated by using available market quotations
deviates from $1.00 per share based on amortized cost. The extent of any
deviation will be examined by the Trustees. If such deviation exceeds 1/2 of 1%,
the Trustees will promptly consider what action, if any, will be initiated. In
the event the Trustees determine that a deviation exists which may result in
material dilution or other unfair results to prospective investors or existing
shareholders, the Trustees will take such corrective action as they consider
necessary and appropriate, including the sale of portfolio instruments prior to
maturity to realize capital gains or losses or to shorten average portfolio
maturity, the withholding of dividends, redemptions of shares in kind, or the
use of available market quotations to establish a net asset value per share.
SHORT-INTERMEDIATE TERM SERIES
Under the Investment Company Act, the Trustees are responsible for
determining in good faith the fair value of the Short-Intermediate Term Series'
securities. In accordance with procedures adopted by the Trustees, the value of
each U.S. Government security for which quotations are available will be based
on the valuation provided by an independent pricing service.
B-34
<PAGE>
Pricing services consider such factors as security prices, yields, maturities,
call features, ratings and developments relating to specific securities in
arriving at securities valuations. Securities for which market quotations are
not readily available are valued by appraisal at their fair value as determined
in good faith by the Manager under procedures established under the general
supervision and responsibility of the Trustees.
Short-term investments which mature in 60 days or less are valued at
amortized cost, if their term to maturity from date of purchase was 60 days or
less, or by amortizing their value on the 61st day prior to maturity if their
term to maturity when acquired by the Intermediate Series was more than 60 days,
unless this is determined not to represent fair value by the Trustees.
TIME NET ASSET VALUE IS CALCULATED
The Trust will calculate its net asset value at 4:15 P.M., New York time,
for the Short-Intermediate Term Series and at 4:30 P.M. for the Money Market
Series and U.S. Treasury Money Market Series, on each day the New York Stock
Exchange is open for trading except on days on which no orders to purchase, sell
or redeem series shares have been received or days on which changes in the value
of a series' securities do not affect net asset value. In the event the New York
Stock Exchange closes early on any business day, the net asset value of the
Short-Intermediate Term Series' shares shall be determined at a time between
such closing and 4:15 P.M. New York time and at a time between such closing and
4:30 P.M. for the Money Market Series' and US Treasury Money Market Series'
shares. The New York Stock Exchange is closed on the following holidays: New
Year's Day, Martin Luther King, Jr. Day, President's Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
TAXES, DIVIDENDS AND DISTRIBUTIONS
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; and (b) 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.
Each Series is required to distribute 98% of its ordinary income in the
same calendar year in which it is earned. Each Series is also required to
distribute during the calendar year 98% of the capital gain net income it
earned, if any, during the 12 months ending on October 31 of such calendar year,
as well as all undistributed ordinary income and undistributed capital gain net
income from the prior year twelve-month period ending on October 31 of such
prior year, respectively. To the extent a Series does not meet these
distribution requirements, it will be subject to a nondeductible 4% excise tax
on the undistributed amount. For purposes of this excise tax, income on which a
Series pays income tax is treated as distributed. Each Series intends to make
timely distributions in order to avoid this excise tax. 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 received by shareholders on
December 31 of the calendar year in which declared. Under this rule, therefore,
a shareholder may be taxed in the prior year on dividends or distributions
actually received in January of the following year.
Dividends paid by a Series from its ordinary income and distributions of a
Series's net realized short-term capital gains are taxable to shareholders as
ordinary income, whether or not reinvested. Generally none of the income of the
Trust will consist of dividends from domestic corporations. Therefore, dividends
of net investment income and distributions of net short-term capital gains will
not be eligible for the dividends received deduction for corporate shareholders.
Distribution of net capital gains (that is, the excess of net capital gains
from the sale of assets held for more than 12 months over net short-term capital
losses, and including such gains from certain transactions in futures and
options), if any, are taxable as capital gains to the shareholders, whether or
not reinvested and regardless of the length of time a shareholder has owned his
or her shares. The maximum capital gains rate for individuals is 20% with
respect to assets held for more than 12 months. The maximum capital gains rate
for corporate shareholders currently is the same as the maximum tax rate for
ordinary income. The U.S. Treasury Money Market Series and the Money Market
Series are not likely to realize long-term capital gains because of the types of
securities they purchase. Net capital gains of a Series that are available for
distribution to shareholders will be computed by taking into account any capital
loss carryforward of such Series.
Upon the redemption, sale or exchange of shares of a Series, a shareholder
may recognize gain or loss. Such gain or loss will be capital gain or loss if
the Shares were held as a capital investment, and such capital gain or loss will
be long-term capital gain
B-35
<PAGE>
or loss if such shares were held for more than 12 months. However, any
short-term capital loss from the sale of shares held for six months or less will
be treated as long-term capital loss to the extent of any capital gain
distributions on such shares.
Any loss realized on a sale, redemption or exchange of shares of a Series
by a shareholder will be disallowed to the extent the shares are replaced within
a 61-day period (beginning 30 days before the disposition of shares). Shares
purchased pursuant to the reinvestment of a dividend will constitute a
replacement of shares.
The Trust has obtained an opinion of counsel to the effect that the
exchange of one class of a Series' shares for another class of its shares does
not constitute a taxable event for federal income tax purposes. However, such an
opinion is not binding on the Internal Revenue Service.
The Trust may purchase debt securities that contain original issue
discount. Original issue discount that accrues in a taxable year is treated as
income earned by that Series and therefore is subject to the distribution
requirements of the Internal Revenue
Code. Debt securities acquired by the Trust also may be subject to the market
discount rules. Because the original issue discount income earned by a Series in
a taxable year may not be represented by cash income, a Series may have to
dispose of other securities and use the proceeds to make distributions to
satisfy the Internal Revenue Code's distribution requirement.
The Short-Intermediate Term Series may engage in various strategies using
derivatives, including the use of put and call options on securities and
financial indices, transactions involving futures contracts and related options,
short selling and the use of leverage, including reverse repurchase agreements
and dollar rolls. Gains and losses on the sale, lapse or other termination of
options on securities will generally be treated as gains and loses from the sale
of securities (assuming they do not qualify as Section 1256 contracts). If an
option written by the Series on securities lapses or is terminated through a
closing transaction, such as a repurchase by the Series of the option from its
holder, the Series should generally realize short-term capital gain or loss. If
securities are sold by the Series pursuant to the exercise of a call option
written by it, the Series will include the premium received in the sale proceeds
of the securities delivered in determining the amount of gain or loss on the
sale. Certain of the Series' transactions may be subject to wash sale, short
sale and constructive sale provisions of the Internal Revenue Code, which may,
in general, disallow or defer certain losses realized by the Series,
recharacterize certain of the Series' long-term capital gains as short-term
capital gains (or short-term capital losses as long term capital losses), and
toll the Series' holding period in certain capital assets.
Regulated future contracts and certain listed options which are not equity
options constitute Section 1256 contracts. Such 1256 contracts will be required
to be marked to market for federal income tax purposes at the end of the Series'
taxable year; that is, treated as having been sold at market value. Sixty
percent of any gain or loss recognized on such deemed sales and on actual
dispositions will be treated as long-term capital gain or loss, and the
remainder will be treated as short-term capital gain or loss.
In addition, positions which are part of a straddle are subject to special
rules including wash sale, short sale and constructive sale provisions of the
Internal Revenue Code. The Series generally will be required to defer the
recognition of losses on positions it holds as part of a straddle to the extent
of any unrecognized gain on offsetting positions held by the Series, and will
not be able to deduct the net interest or other charges incurred to purchase or
carry straddle positions. Capital gains realized by the Series in connection
with a conversion transaction (generally, a transaction the Series' return from
which is attributable solely to the time value of the Series' net investment)
will generally be recharacterized as ordinary income.
See "Taxes, Dividends and Distributions" in the Prospectus of each Series.
PERFORMANCE INFORMATION
MONEY MARKET SERIES AND U.S. TREASURY MONEY MARKET SERIES-CALCULATION OF YIELD
The Money Market Series and U.S. Treasury Money Market Series will each
prepare a current quotation of yield from time to time. The yield quoted will be
the simple annualized yield for an identified seven calendar day period. The
yield calculation will be based on a hypothetical account having a balance of
exactly one share at the beginning of the seven-day period. The base period
return will be the change in the value of the hypothetical account during the
seven-day period, including dividends declared on any shares purchased with
dividends on the shares but excluding any capital changes. The yield will vary
as interest rates and other conditions affecting money market instruments
change. Yield also depends on the quality, length of maturity and type of
instruments in the Money Market Series and U.S. Treasury Money Market Series'
portfolios and their operating expenses. The Money Market Series and U.S.
Treasury Money Market Series may also each prepare an effective annual yield
computed by compounding the unannualized seven-day period return as follows: by
adding 1 to the unannualized seven-day period return, raising the sum to a power
equal to 365 divided by 7, and subtracting 1 from the result.
Effective yield = [(base period return + 1)365/7 ]-1
The U.S. Treasury Money Market Series may also calculate the tax equivalent
yield over a 7-day period. The tax equivalent yield will be determined by first
computing the current yield as discussed above. The Series will then determine
what portion of the yield is attributable to securities, the income of which is
exempt for state and local income tax purposes. This portion of the yield will
then be divided by one minus the maximum state tax rate of individual taxpayers
and then added to the portion of the yield that is attributable to other
securities.
B-36
<PAGE>
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.
SHORT-INTERMEDIATE TERM SERIES-CALCULATION OF YIELD AND TOTAL RETURN
YIELD. The Short-Intermediate Term Series may from time to time advertise
its yield as calculated over a 30-day period. Yield will be computed by dividing
the Short-Intermediate Term Series' net investment income per share earned
during this 30-day period by the net asset value per share on the last day of
this period. Yield is calculated according to the following formula:
a - b
YIELD = 2 [(------ + 1)6-1]
cd
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding during the period
that were entitled to receive dividends.
d = the net asset value per share on the last day of the period.
Yield fluctuates and an annualized yield quotation is not a representation
by the Trust as to what an investment in the Intermediate Term Series will
actually yield for any given period.
The Short-Intermediate Term Series' 30-day yield for the period ended
November 30, 1998 was % for Class A and % for Class Z.
AVERAGE ANNUAL TOTAL RETURN. The Short-Intermediate Term Series may from
time to time advertise its average annual total return.
Average annual total return is computed according to the following formula:
P (1 + T)n = ERV
Where: P = a hypothetical initial payment of $1,000.
T = average annual total return.
n = number of years.
ERV = Ending Redeemable Value at the end of the 1, 5 or 10 year
periods (or fractional portion thereof) of a hypothetical $1,000
payment made at the beginning of the 1, 5 or 10 year periods.
Average annual total return does not take into account any federal or state
income taxes that may be payable upon redemption.
The Short-Intermediate Term Series' average annual total return with
respect to Class A shares for the one, five, ten year and since inception
September 22, 1982 periods ended November 30, 1998 was %, %, % and %,
respectively. The Short-Intermediate Term Series' average annual total return
with respect to Class Z shares for the one year and since inception (February
26, 1997) periods ended November 30, 1998 was % and %, respectively.
AGGREGATE TOTAL RETURN. The Short-Intermediate Term Series may also
advertise its aggregate total return. See "How the Trust Calculates
Performance" in the Prospectus.
Aggregate total return represents the cumulative change in the value of an
investment in the Fund and is computed according to the following formula:
ERV - P
-------
P
Where: P = a hypothetical initial payment of $1,000.
ERV = Ending Redeemable Value at the end of the 1, 5 or 10 year
periods (or fractional portion thereof) of a hypothetical $1,000
investment made at the beginning of the 1, 5 or 10 year periods.
Aggregate total return does not take into account any federal or state
income taxes that may be payable upon redemption.
The Short-Intermediate Term Series' aggregate total return with respect to
Class A shares for the one, five, ten year and since inception (September 22,
1982) periods ended November 30, 1998 was %, %, % and %, respectively. The
Short-Intermediate Term Series' aggregate total return with respect to Class Z
shares for the one year and since inception (February 26, 1997) periods ended
November 30, 1998 was % and %, respectively.
B-37
<PAGE>
[TO COME]
B-38
<PAGE>
PART C
OTHER INFORMATION
ITEM 23. EXHIBITS.
(a) (1) Declaration of Trust a amended and restated on September 6, 1988 of
the Registrant. Incorporated by reference to Exhibit 1(a) to
Post-Effective Amendment No. 27 to the Registration Statement filed
on Form N-1A via EDGAR on February 2, 1998 (File No. 2-74139).
(2) Amendment to Declaration of Trust, dated March 1, 1991.
Incorporated by reference to Exhibit 1(b) to Post-Effective
Amendment No. 27 to the Registration Statement filed on Form N-1A
via EDGAR on February 2, 1998 (File No. 2-74139).
(3) Amended Certificate of Designation dated July 27, 1995. Incorporated
by reference to Exhibit No. 1(c) to Post-Effective Amendment No. 25
to the Registration Statement filed on Form N-1A via EDGAR on
January 25, 1996 (File No. 2-74139).
(4) Amended Certificate of Designation dated January 22, 1996.
Incorporated by reference to Exhibit No. 1(d) to Post-Effective
Amendment No. 25 to the Registration Statement filed on Form N-1A
via EDGAR on January 25, 1996 (File No. 2-74139).
(5) Form of Amended Certificate of Designation dated February 21, 1997.
Incorporated by reference to Exhibit No. 1(e) to Post-Effective
Amendment No. 26 to the Registration Statement filed on Form N-1A
via EDGAR on February 4, 1997. (File No. 2-74139).
(b) By-Laws of the Registrant. Incorporated by reference to Exhibit 2 to
Post-Effective Amendment No. 27 to the Registration Statement filed on
Form N-1A via EDGAR on February 2, 1998 (File No. 2-74139).
(c) (1) Specimen certificate for shares of beneficial interest issued by the
Registrant.**
(2) Specimen certificate for shares of beneficial interest issued by the
Registrant's U.S. Treasury Money Market Series.**
(3) 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).
(d) (1) 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).
(2) Subadvisory Agreement dated August 9, 1988, between Prudential
Mutual Fund Management, Inc. and The Prudential Investment
Corporation Incorporated by reference to Exhibit 5(b) to
Post-Effective Amendment No. 27 to the Registration Statement filed
on Form N-1A via EDGAR on February 2, 1998. (File No. 2-74139).
(e) (1) Distribution Agreement with Prudential Investment Management
Services LLC.*
(2) Dealer Agreement*
(g) Custodian Agreement between the Registrant and State Street Bank and
Trust Company. Incorporated by reference to Exhibit 8 to Post-Effective
Amendment No. 27 to the Registration Statement filed on Form N-1A via
EDGAR on February 2, 1998. (File No. 2-74139)
(h) Transfer Agency Agreement between the Registrant and Prudential Mutual
Fund Services, Inc. Incorporated by reference to Exhibit 9 to
Post-Effective Amendment No. 27 to the Registration Statement filed on
Form N-1A via EDGAR on February 2, 1998. (File No. 2-74139)
(i) Opinion of Sullivan & Worcester. Incorporated by reference to Exhibit
No. 10 to Post-Effective Amendment No. 26 to the Registration Statement
filed on Form N-1A via EDGAR on February 4, 1997 (File No. 2-74139).
(j) Consent of Independent Accountants.**
(m) Amended and Restated Distribution and Service Plan for Class A
Shares.*
(n) Financial Data Schedule.**
(o) Rule 18f-3 Plan*
- -----------
* Filed herewith.
** To be filed by amendment.
C-1
<PAGE>
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
No person is controlled by or under common control with the Registrant.
ITEM 25. INDEMNIFICATION.
As permitted by Section 17(h) and (i) of the Investment Company Act of
1940, as amended, (the "Investment Company Act") and pursuant to Article V of
the Fund's Declaration of Trust with respect to trustees and officers and
Article VII of the Fund's By-Laws (Exhibit 2 to the Registration Statement),
trustees, officers, employees and agents of the Trust may be indemnified against
certain liabilities in connection with the Trust, and pursuant to Section 9 of
the Distribution Agreements (Exhibits 6(e) and 6(f) 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 V of the Declaration of
Trust, Article VII of the By-Laws, as amended and Section 9 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, as amended, 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 so long as
the interpretations of Sections 17(h) and 17(i) of such Act remain in effect and
are consistently applied.
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
(a) Prudential Investments Fund Management LLC
See "How the Series Is Managed" in the Prospectus constituting Part A of
this Registration Statement and "Management of the Trust" in the Statement of
Additional Information constituting Part B of this Registration Statement.
The business and other connections of the officers of PIFM are listed in
Schedules A and D of Form ADV of PMF as currently on file with the Securities
and Exchange Commission, the text of which is hereby incorporated by reference
(File No. 801-31104).
The business and other connections of PIFM's directors and principal
executive officers are set forth below. Except as otherwise indicated, the
address of each person is Gateway Center Three, Newark, NJ 07102.
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH PIFM PRINCIPAL OCCUPATIONS
- -------------------- ------------------------------- ------------------------------------------------------------------------
<S> <C> <C>
Robert F. Gunia Executive Vice President Vice President, Prudential Investments; Executive Vice President and
and Treasurer Treasurer, PIFM; Senior Vice President, Prudential Securities
Neil A. McGuinness Executive Vice President Executive Vice President and Director of Marketing, Prudential Mutual
Funds & Annuities (PMF&A); Executive Vice President, PIFM
Brian Storms Officer-in-Charge, President, President, PMF&A; Officer-in-Charge, President, Chief Executive Officer
Chief Executive Officer and and Chief Operating Officer, PIFM
Chief Operating Officer
Robert J. Sullivan Executive Vice President Executive Vice President, PMF&A; Executive Vice President, PIFM
</TABLE>
(b) The Prudential Investment Corporation (PIC). See "How the Series is
Managed-Investment Adviser" in the Prospectus constituting Part A of the
Regtistration Statement and "Investment Advisory and Other Services" in the
Statement of Additional Information constituting Part B of this Reistration
Statement.
C-2
<PAGE>
The business and other connections of PIC's directors and executiveofficers
are as set forth below. Except as otherwise indicated, the address of each
person is Prudential Plaza, Newark, NJ 07102.
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH PIC PRINCIPAL OCCUPATIONS
- ---------------------- ------------------------ --------------------------------------------------------------------
<S> <C> <C>
E. Michael Caulfield Chairman of the Board, Chief Executive Officer of Prudential Investments of The Prudential
President and Chief Insurance Company of America (Prudential)
Executive Officer and
Director
John R. Strangfeld Vice President and President of Private Asset Management Group of Prudential
Director
</TABLE>
ITEM 27. PRINCIPAL UNDERWRITERS
(a) Prudential Investment Management Services LLC (PIMS)
PIMS is distributor for Prudential Balanced Fund, Prudential California
Municipal Fund, Prudential Diversified Bond Fund, Inc., Prudential Distressed
Securities Fund, Inc., Prudential Emerging Growth Fund, Inc., Prudential Equity
Fund, Inc., Prudential Equity Income Fund, Prudential Europe Growth Fund, Inc.,
Prudential Global Genesis Fund, Inc., Prudential Global Limited Maturity Fund,
Inc., Prudential Government Income Fund, Inc., Prudential Government Securities
Trust, Prudential High Yield Fund, Inc., Prudential High Yield Total Return
Fund, Inc., Prudential Index Series Fund, Prudential Institutional Liquidity
Portfolio, Inc., Prudential Intermediate Global Income Fund, Inc., Prudential
International Bond Fund, Inc., the Prudential Investment Portfolios, Inc.,
Prudential Mid-Cap Value Fund, Prudential Money Mart Assets, Inc., Prudential
Mortgage Income Fund, Inc., Prudential Municipal Bond Fund, Prudential Municipal
Series Fund, Prudential National Municipals Fund, Inc., Prudential Natural
Resources Fund, Inc., Prudential Pacific Growth Fund, Inc., Prudential Real
Estate Securities Fund, Prudential Small-Cap Quantum Fund, Inc., Prudential
Small Company Value Fund, Inc., Prudential Special Money Market Fund, Inc.,
Prudential Structured Maturity Fund, Inc., Prudential Tax-Free Money Fund, Inc.,
Prudential 20/20 Focus Fund, Prudential Utility Fund, Inc., Prudential World
Fund, Inc., Cash Accumulation Trust, Command Government Fund, Command Money
Fund, Command Tax-Free Fund, The Global Total Return Fund, Inc., Global Utility
Fund, Inc., Nicholas-Applegate Fund, Inc. (Nicholas-Applegate Growth Equity
Fund), and The Target Portfolio Trust.
(b) Information concerning the officers and directors of PIMS is set forth
below.
<TABLE>
<CAPTION>
POSITIONS AND POSITIONS AND
OFFICES WITH OFFICES WITH
NAME(1) UNDERWRITER REGISTRANT
- ------------------------------ --------------------------------------------------- --------------
<S> <C> <C>
E. Michael Caulfield ......... President None
Mark R. Fetting .............. Executive Vice President None
Gateway Center Three
100 Mulberry Street
Newark, New Jersey 07102
Jonathan M. Green ............ Executive Vice President None
Jean D. Hamilton ............. Executive Vice President None
Ronald P. Joelson ............ Executive Vice President None
Brian M. Storms .............. Executive Vice President President
Gateway Center Three and
100 Mulberry Street Trustee
Newark, New Jersey 07102
John R. Strangfeld ........... Executive Vice President None
Mario A. Mosse ............... Senior Vice President and Chief Operating Officer None
</TABLE>
C-3
<PAGE>
<TABLE>
<CAPTION>
POSITIONS AND POSITIONS AND
OFFICES WITH OFFICES WITH
NAME(1) UNDERWRITER REGISTRANT
- ------------------------------- ---------------------------------------- ---------------
<S> <C> <C>
Scott S. Wallner .............. Vice President, None
Secretary and Chief
Legal Officer
Michael G. Williamson ......... Vice President, None
Comptroller and Chief Financial Officer
C. Edward Chaplin ............. Treasurer None
</TABLE>
(1) The address of each person named is Prudential Plaza, 751 Broad Street,
Newark, New Jersey 07102 unless otherwise indicated.
(c) Registrant has no principal underwriter who is not an affiliated
person of the Registrant.
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS
All accounts, books and other documents required to be maintained by
Section 31(a) of the 1940 Act and the Rules thereunder are maintained at the
offices of State Street Bank and Trust Company, One Heritage Drive, North
Quincy, Massachusetts 02171, The Prudential Investment Corporation, Prudential
Plaza, 751 Broad Street, Newark, New Jersey 07102, the Registrant, Gateway
Center Three, Newark, New Jersey 07102, and Prudential Mutual Fund Services LLC,
Raritan Plaza One, Edison, New Jersey 08837. Documents required by Rules
31a-1(b)(5), (6), (7), (9), (10) and (11) and 31a-1(f) will be kept at Gateway
Center Three, documents required by Rules 31a-1(b)(4) and (11) and 31a-1(d) at
Gateway Center Three and the remaining accounts, books and other documents
required by such other pertinent provisions of Section 31(a) and the Rules
promulgated thereunder will be kept by State Street Bank and Trust Company and
Prudential Mutual Fund Services LLC.
ITEM 29. MANAGEMENT SERVICES
Other than as set forth under the captions "How the Series Is
Managed-Manager" and "How the Series Is Managed-Distributor" in the Prospectus
and "Investment Advisory and Other Services-Manager and Investment Adviser" and
"-Principal Underwriter, Distributor and Rule 12b-1 Plans" in the Statement of
Additional Information, constituting Parts A and B, respectively, of this
Registration Statement, Registrant is not a party to any management-related
service contract.
ITEM 30. UNDERTAKINGS
The Registrant hereby undertakes to furnish each person to whom a
Prospectus is delivered with a copy of Registrant's latest annual report to
shareholders upon request and without charge.
C-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
(the "1933 Act") and the Investment Company Act of 1940, as amended, the
Registrant has duly caused this Post-Effective Amendment to the Registration
Statement to be signed on its behalf by the undersigned thereunto duly
authorized in the City of New York, and State of New York, on the 29th day of
January, 1999.
PRUDENTIAL GOVERNMENT SECURITIES TRUST
By /s/ Brian S. Storms
-------------------
(BRIAN S. STORMS, PRESIDENT)
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to the Registration Statement has been signed below by
the following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- -------------------------------- ---------------------------- -----------------
<S> <C> <C>
/s/ Edward D. Beach Trustee January 29, 1999
- ------------------------------
EDWARD D. BEACH
/s/ Eugene C. Dorsey Trustee January 29, 1999
- ------------------------------
EUGENE C. DORSEY
/s/ Delayne Dedrick Gold Trustee January 29, 1999
- ------------------------------
DELAYNE DEDRICK GOLD
/s/ Robert F. Gunia Vice President and Trustee January 29, 1999
- ------------------------------
ROBERT F. GUNIA
/s/ Mendel A. Melzer Trustee January 29, 1999
- ------------------------------
MENDEL A. MELZER
/s/ Thomas T. Mooney Trustee January 29, 1999
- ------------------------------
THOMAS T. MOONEY
/s/ Thomas H. O'Brien Trustee January 29, 1999
- ------------------------------
THOMAS H. O'BRIEN
/s/ Richard A. Redeker Trustee January 29, 1999
- ------------------------------
RICHARD A. REDEKER
/s/ Brian S. Storms President and Trustee January 29, 1999
- ------------------------------
BRIAN S. STORMS
/s/ Nancy Hays Teeters Trustee January 29, 1999
- ------------------------------
NANCY HAYS TEETERS
/s/ Louis A. Weill, III Trustee January 29, 1999
- ------------------------------
LOUIS A. WEILL, III
/s/ Grace C. Torres Principal Financial and January 29, 1999
- ------------------------------
GRACE C. TORRES Accounting Officer
</TABLE>
C-5
<PAGE>
EXHIBIT INDEX
(e) (1) Distribution Agreement with Prudential Investment Management Services
LLC
(2) Dealer Agreement.
(m) Amended and Restated Distribution and Service Plan for Class A
Shares.
(o) Rule 18f-3 Plan
C-6
<PAGE>
APPENDIX I
GENERAL INVESTMENT INFORMATION
The following terms are used in mutual fund investing.
ASSET ALLOCATION
Asset allocation is a technique for reducing risk and providing balance.
Asset allocation among different types of securities within an overall
investment portfolio helps to reduce risk and to potentially provide stable
returns, while enabling investors to work toward their financial goal(s). Asset
allocation is also a strategy to gain exposure to better performing asset
classes while maintaining investment in other asset classes.
DIVERSIFICATION
Diversification is a time-honored technique for reducing risk, providing
"balance" to an overall portfolio and potentially achieving more stable returns.
Owning a portfolio of securities mitigates the individual risks (and returns) of
any one security. Additionally, diversification among types of securities
reduces the risks (and general returns) of any one type of security.
DURATION
Debt securities have varying levels of sensitivity to interest rates. As
interest rates fluctuate, the value of a bond (or a bond portfolio) will
increase or decrease. Longer term bonds are generally more sensitive to changes
in interest rates. When interest rates fall, bond prices generally rise.
Conversely, when interest rates rise, bond prices generally fall.
Duration is an approximation of the price sensitivity of a bond (or a bond
portfolio) to interest rate changes. It measures the weighted average maturity
of a bond's (or a bond portfolio's) cash flows, I.E., principal and interest
rate payments. Duration is expressed as a measure of time in years-the longer
the duration of a bond (or a bond portfolio), the greater the impact of interest
rate changes on the bond's (or the bond portfolio's) price. Duration differs
from effective maturity in that duration takes into account call provisions,
coupon rates and other factors. Duration measures interest rate risk only and
not other risks, such as credit risk and, in the case of non-U.S. dollar
denominated securities, currency risk. Effective maturity measures the final
maturity dates of a bond (or a bond portfolio).
MARKET TIMING
Market timing-buying securities when prices are low and selling them when
prices are relatively higher-may not work for many investors because it is
impossible to predict with certainty how the price of a security will fluctuate.
However, owning a security for a long period of time may help investors off-set
short-term price volatility and realize positive returns.
POWER OF COMPOUNDING
Over time, the compounding of returns can significantly impact investment
returns. Compounding is the effect of continuous investment on long-term
investment results, by which the proceeds of capital appreciation (and income
distributions, if elected) are reinvested to contribute to the overall growth of
assets. The long-term investment results of compounding may be greater than that
of an equivalent initial investment in which the proceeds of capital
appreciation and income distributions are taken in cash.
STANDARD DEVIATION
Standard deviation is an absolute (non-relative) measure of volatility
which, for a mutual fund, depicts how widely the returns varied over a certain
period of time. When a fund has a high standard deviation, its range of
performance has been very wide, implying greater volatility potential. Standard
deviation is only one of several measures of a fund's volatility.
I-1
<PAGE>
APPENDIX II
HISTORICAL PERFORMANCE DATA
The historical performance data contained in this Appendix relies on data
obtained from statistical services, reports and other services believed by the
Manager to be reliable. The information has not been independently verified by
the Manager.
The following chart shows the long-term performance of various asset
classes and the rate of inflation.
EACH INVESTMENT PROVIDES A DIFFERENT OPPORTUNITY
CHART
Source: Ibbotson Associates. Used with permission. All rights reserved.
This chart is for illustrative purposes only and is not indicative of the past,
present, or future performance of any asset class or any Prudential Mutual
Fund.
Generally, stock returns are attributable to capital appreciation and the
reinvesting any gains. Bond returns are due mainly to reinvesting interest.
Also, stock prices usually are more volatile than bond prices over the
long-term. Small stock returns for 1926-1989 are those of stocks comprising the
5th quintile of the New York Stock Exchange. Thereafter, returns are those of
the Dimensional Fund Advisors (DFA) Small Company Fund. Common stock returns are
based on the S&P Composite Index, a market-weighted, unmanaged index of 500
stocks (currently) in a variety of industries. It is often used as a broad
measure of stock market performance.
Long-term government bond returns are measured using a constant one-bond
portfolio with a maturity of roughly 20 years. Treasury bill returns are for a
one-month bill. Treasuries are guaranteed by the government as to the timely
payment of principal and interest; equities are not. Inflation is measured by
the consumer price index (CPI).
II-1
<PAGE>
Set forth below is historical performance data relating to various sectors
of the fixed-income securities markets. The chart shows the historical total
returns of U.S. Treasury bonds, U.S. mortgage securities, U.S. corporate bonds,
U.S. high yield corporate bonds and world government bonds on an annual basis
from 1988 through 1998. The total returns of the indices include accrued
interest, plus the price changes (gains or losses) of the underlying securities
during the period mentioned. The data is provided to illustrate the varying
historical total returns and investors should not consider this performance data
as an indication of the future performance of the Fund or of any sector in which
the Fund invests.
All information relies on data obtained from statistical services, reports
and other services believed by the Manager to be reliable. Such information has
not been verified. The figures do not reflect the operating expenses and fees of
a mutual fund. See "Risk/Return Summary-Fees and Expenses" in each Series'
prospectus. The net effect of the deduction of the operating expenses of a
mutual fund on these historical total returns, including the compounded effect
over time, could be substantial.
HISTORICAL TOTAL RETURNS OF DIFFERENT BOND MARKET SECTORS
CHART
- -----------
1 Lehman Brothers Treasury Bond Index is an unmanaged index made up of over 150
public issues of the U.S. Treasury having maturities of at least one year.
2 Lehman Brothers Mortgage-Backed Securities Index is an unmanaged index that
includes over 600 15 and 30-year fixed-rate mortgaged-backed securities of
the Government National Mortgage Association (GNMA), Federal National
Mortgage Association (FNMA), and the Federal Home Loan Mortgage Corporation
(FHLMC).
3 Lehman Brothers Corporate Bond Index includes over 3,000 public fixed-rate,
nonconvertible investment-grade bonds. All bonds are U.S. dollar-denominated
issues and include debt issued or guaranteed by foreign sovereign
governments, municipalities, governmental agencies or international agencies.
All bonds in the index have maturities of at least one year.
4 Lehman Brothers High Yield Bond Index is an unmanaged index comprising over
750 public, fixed-rate, nonconvertible bonds that are rated Ba1 or lower by
Moody's Investors Service (or rated BB+ or lower by Standard & Poor's or
Fitch Investors Service). All bonds in the index have maturities of at least
one year. Data retrieved from Lipper, Inc.
5 Salomon Smith Barney World Government Index (Non U.S.) includes 800 bonds
issued by various foreign governments or agencies, excluding those in the
U.S., but including those in Japan, Germany, France, the U.K., Canada, Italy,
Australia, Belgium, Denmark, the Netherlands, Spain, Sweden, and Austria. All
bonds in the index have maturities of at least one year.
II-2
<PAGE>
This chart illustrates the performance of major world stock markets for
the period from 1985 through 1998. It does not represent the performance of any
Prudential Mutual Fund.
CHART
Source: Morgan Stanley Capital International (MSCI). Used with permission.
Morgan Stanley Country indices are unmanaged indices which include those stocks
making up the largest two-thirds of each country's total stock market
capitalization. Returns reflect the reinvestment of all distributions. This
chart is for illustrative purposes only and is not indicative of the past,
present or future performance of any specific investment. Investors cannot
invest directly in stock indices.
This chart shows the growth of a hypothetical $10,000 investment made in
the stocks representing the S&P 500 stock index with and without reinvested
dividends.
CHART
- -----------
Source: Lipper, Inc. Used with permission. All rights reserved. This chart
is used for illustrative purposes only and is not intended to represent the
past, present or future perfomnance of any Prudential Mutual Fund. Common stock
total return is based on the Standard & Poor's 500 Stock Index, a
market-value-weighted index made up of 500 of the largest stocks in the U.S.
based upon their stock market value. Investors cannot invest directly in
indices.
II-3
<PAGE>
CHART
Source: Morgan Stanley Capital Intenational, December 1998. Used with
permission. This chart represents the capitalization of major world stock
markets as measured by the Morgan Stanley Capital International (MSCI) World
Index. The total market capitalization is based on the value of 1577 companies
in 22 countries (representing approximately 60% of the aggregate market value of
the stock exchanges). This chart is for illustrative purposes only and does not
represent the allocation of any Prudential Mutual Fund.
This chart below shows the historical volatility of general interest rates
as measured by the long U.S. Treasury Bond.
CHART
- -----------
Source: Ibbotson Associates. Used with permission. All rights reserved. The
chart illustrates the historical yield of the long-term U.S. Treasury Bond from
1926-1998. Yields represent that of an annually renewed one-bond portfolio with
a remaining maturity of approximately 20 years. This chart is for illustrative
purposes and should not be constnued to represent the yields of any Prudential
Mutual Fund.
II-4
<PAGE>
APPENDIX III-INFORMATION RELATING TO THE PRUDENTIAL
Set forth below is information relating to The Prudential Insurance Company
of America (Prudential) and its subsidiaries as well as information relating to
the Prudential Mutual Funds. See "How the Series is Managed-Manager" in the
Prospectus. The data will be used in sales materials relating to the Prudential
Mutual Funds. Unless otherwise indicated, the information is as of December 31,
1997 and is subject to change thereafter. All information relies on data
provided by The Prudential Investment Corporation (PIC) or from other sources
believed by the Manager to be reliable. Such information has not been verified
by the Fund.
INFORMATION ABOUT PRUDENTIAL
The Manager and PIC1 are subsidiaries of Prudential, which is one of the
largest diversified financial services institutions in the world and, based on
total assets, the largest insurance company in North America as of December 31,
1997. Its principal products and services include life and health insurance,
other healthcare products, property and casualty insurance, securities brokerage
asset management, investment advisory services and real estate brokerage .
Prudential (together with its subsidiaries) employs more than 79,000 persons
worldwide, and maintains a sales force of approximately 10,100 agents and 6,500
financial advisors. Prudential is a major issuer of annuities, including
variable annuities. Prudential seeks to develop innovative products and services
to meet consumer needs in each of its business areas. Prudential uses the rock
of Gibraltar as its symbol. The Prudential rock is a recognized brand name
throughout the world.
INSURANCE. Prudential has been engaged in the insurance business since
1875. It insures or provides financial services to more than 40 million people
worldwide-one of every five people in the United States. Long one of the largest
issuers of individual life insurance, the Prudential has 25 million life
insurance policies in force today with a face value of almost $1 trillion.
Prudential has the largest capital base ($12.1 billion) of any life insurance
company in the United States. The Prudential provides auto insurance for more
than 1.5 million cars and insures more than 1.2 million homes.
MONEY MANAGEMENT. The Prudential is one of the largest pension fund
managers in the country, providing pension services to 1 in 3 Fortune 500 firms.
It manages $36 billion of individual retirement plan assets, such as 401(k)
plans. As of of December 31,1997, Prudential had more than $370 billion in
assets under management. Prudential Investments, a business group of Prudential
(of which Prudential Mutual Funds is a key part), manages over $211 billion in
assets of institutions and individuals. In INSTITUTIONAL INVESTOR, July 1998,
Prudential was ranked eighth in terms of total assets under management as of
December 31, 1997.
REAL ESTATE. The Prudential Real Estate Affiliates is one of the leading
real estate residential and commercial brokerage networks in North America and
has more than 37,000 real estate brokers and agents with over 1,400 office
across the United States. 2
HEALTHCARE. Over two decades ago, the Prudential introduced the first
federally-funded, for-profit HMO in the country. Today, approximately 4.9
million Americans receive healthcare from a Prudential managed care
membership.3
FINANCIAL SERVICES. The Prudential Savings Bank (FSB), a wholly-owned
subsidiary of the Prudential, has nearly $1 billion in assets and serves nearly
1.5 million customers across 50 states.
INFORMATION ABOUT THE PRUDENTIAL MUTUAL FUNDS
As of November 30, 1998, Prudential Investments Fund Management was the
eighteenth largest mutual fund company in the country, with over 2.5 million
shareholders invested in more than 50 mutual fund portfolios and variable
annuities with more than 3.7 million shareholder accounts.
The Prudential Mutual Funds have over 30 portfolio managers who manage over
$55 billion in mutual fund and variable annuity assets. Some of Prudential's
portfolio managers have over 20 years of experience managing investment
portfolios.
From time to time, there may be media coverage of portfolio managers and
other investment professionals associated with the Manager and the Subadviser in
national and regional publications, on television and in other media.
Additionally, individual mutual fund portfolios are frequently cited in surveys
conducted by national and regional publications and media organizations such as
THE WALL STREET JOURNAL, THE NEW YORK TIMES, BARRONS and USA TODAY.
- -----------
1 PIC serves as the Subadviser to substantially all of the Prudential Mutual
Funds. Wellington Management Company serves as the subadviser to Global
Utility Fund, Inc., Nicholas-Applegate Capital Management as subadviser to
Nicholas-Applegate Fund, Inc., Jennison Associates Capital Corp. as one of
the subadvisers to The Prudential Investment Portfolios, Inc. and Mercator
Asset Management LP as the subadviser to International Stock Series, a
portfolio of Prudential World Fund, Inc. There are multiple subadvisers for
The Target Portfolio Trust.
2 As of December 31, 1997.
3 On December 10, 1998, Prudential announced its intention to sell Prudential
Health Care to Aetna Inc. for $1 billion.
III-1
<PAGE>
EQUITY FUNDS. Prudential Equity Fund is managed with a "value" investment style
by PIC. In 1995, Prudential Securities introduced Prudential Jennison Growth
Fund, a growth-style equity fund managed by Jennison Associates LLC, a premier
institutional equity manager and a subsidiary of Prudential.
HIGH YIELD FUNDS. Investing in high yield bonds is a complex and research
intensive pursuit. A separate team of high yield bond analysts monitor
approximately 200 issues held in the Prudential High Yield Fund (currently the
largest fund of its kind in the country) along with 100 or so other high yield
bonds, which may be considered for purchased.4 Non-investment grade bonds, also
known as junk bonds or high yield bonds, are subject to a greater risk of loss
of principal and interest including default risk than higher-rated bonds.
Prudential high yield portfolio managers and analysts meet face-to-face with
almost every bond issuer in the High Yield Fund's portfolio annually, and have
additional telephone contact throughout the year.
Prudential's portfolio managers are supported by a large and sophisticated
research organization. Investment grade bond analysts monitor the financial
viability of different bond issuers in the investment grade corporate and
municipal bond markets-from IBM to small municipalities, such as Rockaway
Township, New Jersey. These analysts consider among other things sinking fund
provisions and interest coverage ratios.
Prudential's portfolio managers and analysts receive research services from
almost 200 brokers and market service vendors. They also receive nearly 100
trade publications and newspapers-from Pulp and Paper Forecaster to Women's Wear
Daily-to keep them informed of the industries they follow.
Prudential Mutual Funds' traders scan over 100 computer monitors to collect
detailed information on which to trade. From natural gas prices in the Rocky
Mountains to the results of local municipal elections, a Prudential portfolio
manager or trader is able to monitor it if it's important to a Prudential Mutual
Fund.
Prudential Mutual Funds trades billions in U.S. and foreign government
securities a year. PIC seeks information from government policy makers.
Prudential's portfolio managers met with several senior U.S. and foreign
government officials, on issues ranging from economic conditions in foreign
countries to the viability of index-linked securities in the United States.
INFORMATION ABOUT PRUDENTIAL SECURITIES
Prudential Securities is the fifth largest retail brokerage firm in the
United States with approximately 6,000 financial advisors. It offers to its
clients a wide range of products, including Prudential Mutual Funds and
annuities. As of December 31, 1997, assets held by Prudential Securities for its
clients approximated $268 billion. During 1998, over 31,000 new customer
accounts were opened each month at Prudential Securities.5
Prudential Securities has a two-year Financial Advisor training program
plus advanced education programs, including Prudential Securities "university,"
which provides advanced education in a wide array of investment and financial
planning areas.
In addition to training, Prudential Securities provides its financial
advisors with access to firm economists and market analysts. It has also
developed proprietary tools for use by financial advisors, including the
Financial Architects/Financial Advisors to evaluate a client's objectives and
overall financial plan, and a comprehensive mutual fund information and analysis
system that compares different mutual funds.
For more complete information about any of the Prudential Mutual Funds,
including charges and expenses, call your Prudential Securities financial
adviser or Pruco/Prudential representative for a free prospectus. Read it
carefully before you invest or send money.
- -----------
4 As of December 31, 1997. The number of bonds and the size of the Fund are
subject to change.
5 As of December 31, 1997.
III-2
PRUDENTIAL GOVERNMENT SECURITIES TRUST
Distribution Agreement
----------------------
Agreement made as of June 1, 1998, between Prudential
Government Securities Trust (the Fund), and Prudential Investment Management
Services LLC, a Delaware limited liability company (the Distributor).
WITNESSETH
WHEREAS, the Fund is registered under the Investment Company
Act of 1940, as amended (the Investment Company Act), as a diversified,
open-end, management investment company and it is in the interest of the Fund to
offer its shares for sale continuously;
WHEREAS, the shares of the Fund may be divided into classes
and/or series (all such shares being referred to herein as Shares) and the Fund
currently is authorized to offer Class A and Class Z Shares;
WHEREAS, the Distributor is a broker-dealer registered under
the Securities Exchange Act of 1934, as amended, and is engaged in the business
of selling shares of registered investment companies either directly or through
other broker-dealers;
WHEREAS, the Fund and the Distributor wish to enter into an
agreement with each other, with respect to the continuous offering of the Fund's
Shares from and after the date hereof in order to promote the growth of the Fund
and facilitate the distribution of its Shares; and
WHEREAS, the Fund has adopted a plan (or plans) of
distribution pursuant to Rule 12b-1 under the Investment Company Act with
respect to certain of its classes and/or series of Shares (the Plans)
authorizing payments by the Fund to the Distributor with respect to the
distribution of such classes and/or series of Shares and the maintenance of
related shareholder accounts.
NOW, THEREFORE, the parties agree as follows:
Section 1. Appointment of the Distributor
------------------------------
The Fund hereby appoints the Distributor as the principal
underwriter and distributor of the Shares of the Fund to sell Shares to the
public on behalf of the Fund and the Distributor hereby accepts such appointment
and agrees to act hereunder. The Fund hereby agrees during the term of this
Agreement to sell Shares of the Fund through the Distributor on the terms and
conditions set forth below.
<PAGE>
Section 2. Exclusive Nature of Duties
--------------------------
The Distributor shall be the exclusive representative of the
Fund to act as principal underwriter and distributor of the Fund's Shares,
except that:
2.1 The exclusive rights granted to the Distributor to sell
Shares of the Fund shall not apply to Shares of the Fund issued in connection
with the merger or consolidation of any other investment company or personal
holding company with the Fund or the acquisition by purchase or otherwise of all
(or substantially all) the assets or the outstanding shares of any such company
by the Fund.
2.2 Such exclusive rights shall not apply to Shares issued by
the Fund pursuant to reinvestment of dividends or capital gains distributions or
through the exercise of any conversion feature or exchange privilege.
2.3 Such exclusive rights shall not apply to Shares issued by
the Fund pursuant to the reinstatement privilege afforded redeeming
shareholders.
2.4 Such exclusive rights shall not apply to purchases made
through the Fund's transfer and dividend disbursing agent in the manner set
forth in the currently effective Prospectus of the Fund. The term "Prospectus"
shall mean the Prospectus and Statement of Additional Information included as
part of the Fund's Registration Statement, as such Prospectus and Statement of
Additional Information may be amended or supplemented from time to time, and the
term "Registration Statement" shall mean the Registration Statement filed by the
Fund with the Securities and Exchange Commission and effective under the
Securities Act of 1933, as amended (Securities Act), and the Investment Company
Act, as such Registration Statement is amended from time to time.
Section 3. Purchase of Shares from the Fund
--------------------------------
3.1 The Distributor shall have the right to buy from the Fund
on behalf of investors the Shares needed, but not more than the Shares needed
(except for clerical errors in transmission) to fill unconditional orders for
Shares placed with the Distributor by investors or registered and qualified
securities dealers and other financial institutions (selected dealers).
3.2 The Shares shall be sold by the Distributor on behalf of
the Fund and delivered by the Distributor or selected dealers, as described in
Section 6.4 hereof, to investors at the offering price as set forth in the
Prospectus.
3.3 The Fund shall have the right to suspend the sale of any
or all classes and/or series of its Shares at times when redemption is suspended
pursuant to
2
<PAGE>
the conditions in Section 4.3 hereof or at such other times as may be determined
by the Board. The Fund shall also have the right to suspend the sale of any or
all classes and/or series of its Shares if a banking moratorium shall have been
declared by federal or New Jersey authorities.
3.4 The Fund, or any agent of the Fund designated in writing
by the Fund, shall be promptly advised of all purchase orders for Shares
received by the Distributor. Any order may be rejected by the Fund; provided,
however, that the Fund will not arbitrarily or without reasonable cause refuse
to accept or confirm orders for the purchase of Shares. The Fund (or its agent)
will confirm orders upon their receipt, will make appropriate book entries and
upon receipt by the Fund (or its agent) of payment therefor, will deliver
deposit receipts for such Shares pursuant to the instructions of the
Distributor. Payment shall be made to the Fund in New York Clearing House funds
or federal funds. The Distributor agrees to cause such payment and such
instructions to be delivered promptly to the Fund (or its agent).
Section 4. Repurchase or Redemption of Shares by the Fund
----------------------------------------------
4.1 Any of the outstanding Shares may be tendered for
redemption at any time, and the Fund agrees to repurchase or redeem the Shares
so tendered in accordance with its Declaration of Trust as amended from time to
time, and in accordance with the applicable provisions of the Prospectus. The
price to be paid to redeem or repurchase the Shares shall be equal to the net
asset value determined as set forth in the Prospectus. All payments by the Fund
hereunder shall be made in the manner set forth in Section 4.2 below.
4.2 The Fund shall pay the total amount of the redemption
price as defined in the above paragraph pursuant to the instructions of the
Distributor on or before the seventh day subsequent to its having received the
notice of redemption in proper form. The proceeds of any redemption of Shares
shall be paid by the Fund as follows: (i) in the case of Shares subject to a
contingent deferred sales charge, any applicable contingent deferred sales
charge shall be paid to the Distributor, and the balance shall be paid to or for
the account of the redeeming shareholder, in each case in accordance with
applicable provisions of the Prospectus; and (ii) in the case of all other
Shares, proceeds shall be paid to or for the account of the redeeming
shareholder, in each case in accordance with applicable provisions of the
Prospectus.
4.3 Redemption of any class and/or series of Shares or payment
may be suspended at times when the New York Stock Exchange is closed for other
than customary weekends and holidays, when trading on said Exchange is
restricted, when an emergency exists as a result of which disposal by the Fund
of securities owned by it is not reasonably practicable or it is not reasonably
practicable for the Fund fairly to determine the value of its net assets, or
during any other period when the Securities and Exchange Commission, by order,
so permits.
3
<PAGE>
Section 5. Duties of the Fund
------------------
5.1 Subject to the possible suspension of the sale of Shares
as provided herein, the Fund agrees to sell its Shares so long as it has Shares
of the respective class and/or series available.
5.2 The Fund shall furnish the Distributor copies of all
information, financial statements and other papers which the Distributor may
reasonably request for use in connection with the distribution of Shares, and
this shall include one certified copy, upon request by the Distributor, of all
financial statements prepared for the Fund by independent public accountants.
The Fund shall make available to the Distributor such number of copies of its
Prospectus and annual and interim reports as the Distributor shall reasonably
request.
5.3 The Fund shall take, from time to time, but subject to the
necessary approval of the Board and the shareholders, all necessary action to
register the same under the Securities Act, to the end that there will be
available for sale such number of Shares as the Distributor reasonably may
expect to sell. The Fund agrees to file from time to time such amendments,
reports and other documents as may be necessary in order that there will be no
untrue statement of a material fact in the Registration Statement, or necessary
in order that there will be no omission to state a material fact in the
Registration Statement which omission would make the statements therein
misleading.
5.4 The Fund shall use its best efforts to notify such states
as the Distributor and the Fund may approve of its intention to sell any
appropriate number of its Shares; provided that the Fund shall not be required
to amend its 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 its Shares in any state from the terms set forth in its Registration
Statement, to qualify as a foreign corporation in any state or to consent to
service of process in any state other than with respect to claims arising out of
the offering of its Shares. Any such notification may be withheld, terminated or
withdrawn by the Fund at any time in its discretion. As provided in Section 9
hereof, the expense of notification and maintenance of notification shall be
borne by the Fund. The Distributor shall furnish such information and other
material relating to its affairs and activities as may be required by the Fund
in connection with such notifications.
4
<PAGE>
Section 6. Duties of the Distributor
-------------------------
6.1 The Distributor shall devote reasonable time and effort to
effect sales of Shares, but shall not be obligated to sell any specific number
of Shares. Sales of the Shares shall be on the terms described in the
Prospectus. The Distributor may enter into like arrangements with other
investment companies. The Distributor shall compensate the selected dealers as
set forth in the Prospectus.
6.2 In selling the Shares, the Distributor shall use its best
efforts in all respects duly to conform with the requirements of all federal and
state laws relating to the sale of such securities. Neither the Distributor nor
any selected dealer nor any other person is authorized by the Fund to give any
information or to make any representations, other than those contained in the
Registration Statement or Prospectus and any sales literature approved by
appropriate officers of the Fund.
6.3 The Distributor shall adopt and follow procedures for the
confirmation of sales to investors and selected dealers, the collection of
amounts payable by investors and selected dealers on such sales and the
cancellation of unsettled transactions, as may be necessary to comply with the
requirements of Securities Exchange Act Rule 10b-10 and the rules of the
National Association of Securities Dealers, Inc. (NASD).
6.4 The Distributor shall have the right to enter into
selected dealer agreements with registered and qualified securities dealers and
other financial institutions of its choice for the sale of Shares, provided that
the Fund shall approve the forms of such agreements. Within the United States,
the Distributor shall offer and sell Shares only to such selected dealers as are
members in good standing of the NASD or are institutions exempt from
registration under applicable federal securities laws. Shares sold to selected
dealers shall be for resale by such dealers only at the offering price
determined as set forth in the Prospectus.
Section 7. Payments to the Distributor
---------------------------
7.1 With respect to classes and/or series of Shares which
impose a front-end sales charge, the Distributor shall receive and may retain
any portion of any front-end sales charge which is imposed on such sales and not
reallocated to selected dealers as set forth in the Prospectus, subject to the
limitations of Rule 2830 of the Conduct Rules of the NASD. Payment of these
amounts to the Distributor is not contingent upon the adoption or continuation
of any applicable Plans.
7.2 With respect to classes and/or series of Shares which
impose a contingent deferred sales charge, the Distributor shall receive and may
retain any contingent deferred sales charge which is imposed on such sales as
set forth in the Prospectus, subject to the limitations of Rule 2830 of the
Conduct Rules of the NASD.
5
<PAGE>
Payment of these amounts to the Distributor is not contingent upon the adoption
or continuation of any Plan.
Section 8. Payment of the Distributor under the Plan
-----------------------------------------
8.1 The Fund shall pay to the Distributor as compensation for
services under any Plans adopted by the Fund and this Agreement a distribution
and service fee with respect to the Fund's classes and/or series of Shares as
described in each of the Fund's respective Plans and this Agreement.
8.2 So long as a Plan or any amendment thereto is in effect,
the Distributor shall inform the Board of the commissions and account servicing
fees with respect to the relevant class and/or series of Shares to be paid by
the Distributor to account executives of the Distributor and to broker-dealers,
financial institutions and investment advisers which have dealer agreements with
the Distributor. So long as a Plan (or any amendment thereto) is in effect, at
the request of the Board or any agent or representative of the Fund, the
Distributor shall provide such additional information as may reasonably be
requested concerning the activities of the Distributor hereunder and the costs
incurred in performing such activities with respect to the relevant class and/or
series of Shares.
Section 9. Allocation of Expenses
----------------------
The Fund shall bear all costs and expenses of the continuous
offering of its Shares (except for those costs and expenses borne by the
Distributor pursuant to a Plan and subject to the requirements of Rule 12b-1
under the Investment Company Act), including fees and disbursements of its
counsel and auditors, in connection with the preparation and filing of any
required Registration Statements and/or Prospectuses under the Investment
Company Act or the Securities Act, and all amendments and supplements thereto,
and preparing and mailing annual and periodic reports and proxy materials to
shareholders (including but not limited to the expense of setting in type any
such Registration Statements, Prospectuses, annual or periodic reports or proxy
materials). The Fund shall also bear the cost of expenses of making notice
filings for the Shares for sale, and, if necessary or advisable in connection
therewith, of qualifying the Fund as a broker or dealer, in such states of the
United States or other jurisdictions as shall be selected by the Fund and the
Distributor pursuant to Section 5.4 hereof and the cost and expense payable to
each such state for continuing notification therein until the Fund decides to
discontinue such notification pursuant to Section 5.4 hereof. As set forth in
Section 8 above, the Fund shall also bear the expenses it assumes pursuant to
any Plan, so long as such Plan is in effect.
6
<PAGE>
Section 10. Indemnification
---------------
10.1 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 reasonable counsel fees incurred in connection therewith)
which the Distributor, its officers, members or any such controlling person may
incur under the Securities Act, or under common law or otherwise, arising out of
or based upon any untrue statement of a material fact contained in the
Registration Statement or Prospectus or arising out of or based upon any alleged
omission to state a material fact required to be stated in either thereof or
necessary to make the statements in either thereof not misleading, except
insofar as such claims, demands, liabilities or expenses arise out of or are
based upon any such untrue statement or omission or alleged untrue statement or
omission made in reliance upon and in conformity with information furnished by
the Distributor to the Fund for use in the Registration Statement or Prospectus;
provided, however, that this indemnity agreement shall not inure to the benefit
of any such officer, member or controlling person unless a court of competent
jurisdiction shall determine in a final decision on the merits, that the person
to be indemnified was not liable by reason of willful misfeasance, bad faith or
gross negligence in the performance of its duties, or by reason of its reckless
disregard of its obligations under this Agreement (disabling conduct), or, in
the absence of such a decision, a reasonable determination, based upon a review
of the facts, that the indemnified person was not liable by reason of disabling
conduct, by (a) a vote of a majority of a quorum of trustees or 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 members and any such controlling person as
aforesaid is expressly conditioned upon the Fund's being promptly notified of
any action brought against the Distributor, its officers or members, or any such
controlling person, such notification to be given by letter or telegram
addressed to the Fund at its principal business office. The Fund agrees promptly
to notify the Distributor of the commencement of any litigation or proceedings
against it or any of its officers or directors in connection with the issue and
sale of any Shares.
10.2 The Distributor agrees to indemnify, defend and hold the
Fund, its officers and 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 liabilities
and any reasonable 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
7
<PAGE>
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 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 being given to the Distributor at
its principal business office.
Section 11. Duration and Termination of this Agreement
------------------------------------------
11.1 This Agreement shall become effective as of the date
first above written and shall remain in force for two years from the date hereof
and thereafter, but only so long as such continuance is specifically approved at
least annually by (a) the Board of the Fund, or by the vote of a majority of the
outstanding voting securities of the applicable class and/or series of the Fund,
and (b) by the vote of a majority of those 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 any of the
Fund's Plans or in any agreement related thereto (Independent trustees), cast in
person at a meeting called for the purpose of voting upon such approval.
11.2 This Agreement may be terminated at any time, without the
payment of any penalty, by a majority of the independent trustees or by vote of
a majority of the outstanding voting securities of the applicable class and/or
series of the Fund, or by the Distributor, on sixty (60) days' written notice to
the other party. This Agreement shall automatically terminate in the event of
its assignment.
11.3 The terms "affiliated person," "assignment," "interested
person" and "vote of a majority of the outstanding voting securities", when used
in this Agreement, shall have the respective meanings specified in the
Investment Company Act.
Section 12. Amendments to this Agreement
----------------------------
This Agreement may be amended by the parties only if such
amendment is specifically approved by (a) the Board of the Fund, or by the vote
of a majority of the outstanding voting securities of the applicable class
and/or series of the Fund, and (b) by the vote of a majority of the independent
trustees cast in person at a meeting called for the purpose of voting on such
amendment.
8
<PAGE>
Section 13. Separate Agreement as to Classes and/or Series
----------------------------------------------
The amendment or termination of this Agreement with respect to
any class and/or series shall not result in the amendment or termination of this
Agreement with respect to any other class and/or series unless explicitly so
provided.
Section 14. Governing Law
-------------
The provisions of this Agreement shall be construed and
interpreted in accordance with the laws of the State of New Jersey as at the
time in effect and the applicable provisions of the Investment Company Act. To
the extent that the applicable law of the State of New Jersey, or any of the
provisions herein, conflict with the applicable provisions of the Investment
Company Act, the latter shall control.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the day and year above written.
Prudential Investment Management Services LLC
By: /s/ MARK R. FETTING
----------------------------------------------
Mark R. Fetting
Executive Vice President
Prudential Government Securities Trust
By: /s/ RICHARD A. REDEKER
----------------------------------------------
Richard A. Redeker
President
9
DEALER AGREEMENT
PRUDENTIAL INVESTMENT MANAGEMENT SERVICES LLC
Prudential Investment Management Services LLC ("Distributor") and
_________________ ("Dealer") have agreed that Dealer will participate in the
distribution of shares ("Shares") of all the funds and series thereof (as they
may exist from time to time) comprising the Prudential Mutual Fund Family (each
a "Fund" and collectively the "Funds") and any classes thereof for which
Distributor now or in the future serves as principal underwriter and
distributor, subject to the terms of this Dealer Agreement ("Agreement"). Any
such additional Funds will be included in this Agreement upon Distributor's
written notification to Dealer.
1. LICENSING
a. Dealer represents and warrants that it is: (i) a
broker-dealer registered with the Securities and Exchange Commission ("SEC");
(ii) a member in good standing of the National Association of Securities
Dealers, Inc. ("NASD"); and (iii) licensed by the appropriate regulatory agency
of each state or other jurisdiction in which Dealer will offer and sell Shares
of the Funds, to the extent necessary to perform the duties and activities
contemplated by this Agreement.
b. Dealer represents and warrants that each of its
partners, directors, officers, employees, and agents who will be utilized by
Dealer with respect to its duties and activities under this Agreement is either
appropriately licensed or exempt from such licensing requirements by the
appropriate regulatory agency of each state or other jurisdiction in which
Dealer will offer and sell Shares of the Funds.
c. Dealer agrees that: (i) termination or suspension of
its registration with the SEC; (ii) termination or suspension of its membership
with the NASD; or (iii) termination or suspension of its license to do business
by any state or other jurisdiction or federal regulatory agency shall
immediately cause the termination of this Agreement. Dealer further agrees to
immediately notify Distributor in writing of any such action or event.
d. agrees that this Agreement is in all respects subject
to the Conduct Rules of the NASD and such Conduct Rules shall control any
provision to the contrary in this Agreement.
e. Dealer agrees to be bound by and to comply with all
applicable state and federal laws and all rules and regulations promulgated
thereunder generally affecting the sale or distribution of mutual fund shares.
2. ORDERS
a. Dealer agrees to offer and sell Shares of the Funds
(including those of each of its classes) only at the regular public offering
price applicable to such Shares and in effect at the time of each transaction.
The procedures relating to all orders and the handling of each order (including
the manner of computing the net asset value of Shares and the effective time of
orders received from Dealer) are subject to: (i) the terms of the then current
prospectus and statement of
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additional information (including any supplements, stickers or amendments
thereto) relating to each Fund, as filed with the SEC ("Prospectus"); (ii) the
new account application for each Fund, as supplemented or amended from time to
time; and (iii) Distributor's written instructions and multiple class pricing
procedures and guidelines, as provided to Dealer from time to time. To the
extent that the Prospectus contains provisions that are inconsistent with this
Agreement or any other document, the terms of the Prospectus shall be
controlling.
b. Distributor reserves the right at any time, and without
notice to Dealer, to suspend the sale of Shares or to withdraw or limit the
offering of Shares. Distributor reserves the unqualified right not to accept any
specific order for the purchase or sale of Shares.
c. In all offers and sales of the Shares to the public,
Dealer is not authorized to act as broker or agent for, or employee of,
Distributor, any Fund or any other dealer, and Dealer shall not in any manner
represent to any third party that Dealer has such authority or is acting in such
capacity. Rather, Dealer agrees that it is acting as principal for Dealer's own
account or as agent on behalf of Dealer's customers in all transactions in
Shares, except as provided in Section 3.i. hereof. Dealer acknowledges that it
is solely responsible for all suitability determinations with respect to sales
of Shares of the Funds to Dealer's customers and that Distributor has no
responsibility for the manner of Dealer's performance of, or for Dealer's acts
or omissions in connection with, the duties and activities Dealer provides under
this Agreement.
d. All orders are subject to acceptance by Distributor in
its sole discretion and become effective only upon confirmation by Distributor.
e. Distributor agrees that it will accept from Dealer
orders placed through a remote terminal or otherwise electronically transmitted
via the National Securities Clearing Corporation ("NSCC") Fund/Serv Networking
program, provided, however, that appropriate documentation thereof and
agreements relating thereto are executed by both parties to this Agreement,
including in particular the standard NSCC Networking Agreement and any other
related agreements between Distributor and Dealer deemed appropriate by
Distributor, and that all accounts opened or maintained pursuant to that program
will be governed by applicable NSCC rules and procedures. Both parties further
agree that, if the NSCC Fund/Serv Networking program is used to place orders,
the standard NSCC Networking Agreement will control insofar as there is any
conflict between any provision of the Dealer Agreement and the standard NSCC
Networking Agreement.
3. DUTIES OF DEALER
a. Dealer agrees to purchase Shares only from Distributor
or from Dealer's customers.
b. Dealer agrees to enter orders for the purchase of
Shares only from Distributor and only for the purpose of covering purchase
orders Dealer has already received from its customers or for Dealer's own bona
fide investment.
c. Dealer agrees to date and time stamp all orders
received by Dealer and promptly, upon receipt of any and all orders, to transmit
to Distributor all orders received prior to
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the time described in the Prospectus for the calculation of each Fund's net
asset value so as to permit Distributor to process all orders at the price next
determined after receipt by Dealer, in accordance with the Prospectus. Dealer
agrees not to withhold placing orders for Shares with Distributor so as to
profit itself as a result of such inaction.
d. Dealer agrees to maintain records of all purchases and
sales of Shares made through Dealer and to furnish Distributor or regulatory
authorities with copies of such records upon request. In that regard, Dealer
agrees that, unless Dealer holds Shares as nominee for its customers or
participates in the NSCC Fund/Serv Networking program, at certain matrix levels,
it will provide Distributor with all necessary information to comply properly
with all federal, state and local reporting requirements and backup and
nonresident alien withholding requirements for its customer accounts including,
without limitation, those requirements that apply by treating Shares issued by
the Funds as readily tradable instruments. Dealer represents and agrees that all
Taxpayer Identification Numbers ("TINs") provided are certified, and that no
account that requires a certified TIN will be established without such certified
TIN. With respect to all other accounts, including Shares held by Dealer in
omnibus accounts and Shares purchased or sold through the NSCC Fund/Serv
Networking program, at certain matrix levels, Dealer agrees to perform all
federal, state and local tax reporting with respect to such accounts, including
without limitation redemptions and exchanges.
e. Dealer agrees to distribute or cause to be delivered to
its customers Prospectuses, proxy solicitation materials and related information
and proxy cards, semi-annual and annual shareholder reports and any other
materials in compliance with applicable legal requirements, except to the extent
that Distributor expressly undertakes to do so in writing.
f. Dealer agrees that if any Share is repurchased by any
Fund or is tendered for redemption within seven (7) business days after
confirmation by Distributor of the original purchase order from Dealer, Dealer
shall forfeit its right to any concession or commission received by Dealer with
respect to such Share and shall forthwith refund to Distributor the full
concession allowed to Dealer or commission paid to Dealer on the original sale.
Distributor agrees to notify Dealer of such repurchase or redemption within a
reasonable time after settlement. Termination or cancellation of this Agreement
shall not relieve Dealer from its obligation under this provision.
g. Dealer agrees that payment for Shares ordered from
Distributor shall be in Fed Funds, New York clearinghouse or other immediately
available funds and that such funds shall be received by Distributor by the
earlier of: (i) the end of the third (3rd) business day following Dealer's
receipt of the customer's order to purchase such Shares; or (ii) the settlement
date established in accordance with Rule 15c6-1 under the Securities Exchange
Act of 1934, as amended. If such payment is not received by Distributor by such
date, Dealer shall forfeit its right to any concession or commission with
respect to such order, and Distributor reserves the right, without notice,
forthwith to cancel the sale, or, at its option, to sell the Shares ordered back
to the Fund, in which case Distributor may hold Dealer responsible for any loss,
including loss of profit, suffered by Distributor resulting from Dealer's
failure to make payment as aforesaid. If a purchase is made by check, the
purchase is deemed made upon conversion of the purchase instrument into Fed
Funds, New York clearinghouse or other immediately available funds.
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h. Dealer agrees that it: (i) shall assume responsibility
for any loss to the Fund caused by a correction to any order placed by Dealer
that is made subsequent to the trade date for the order, provided such order
correction was not based on any negligence on Distributor's part; and (ii) will
immediately pay such loss to the Fund upon notification.
i. Dealer agrees that in connection with orders for the
purchase of Shares on behalf of any IRAs, 401(k) plans or other retirement plan
accounts, by mail, telephone, or wire, Dealer shall act as agent for the
custodian or trustee of such plans (solely with respect to the time of receipt
of the application and payments), and Dealer shall not place such an order with
Distributor until it has received from its customer payment for such purchase
and, if such purchase represents the first contribution to such a retirement
plan account, the completed documents necessary to establish the retirement
plan. Dealer agrees to indemnify Distributor and its affiliates for any claim,
loss, or liability resulting from incorrect investment instructions received by
Distributor from Dealer.
j. Dealer agrees that it will not make any conditional
orders for the purchase or redemption of Shares and acknowledges that
Distributor will not accept conditional orders for Shares.
k. Dealer agrees that all out-of-pocket expenses incurred
by it in connection with its activities under this Agreement will be borne by
Dealer.
l. Dealer agrees that it will keep in force appropriate
broker's blanket bond insurance policies covering any and all acts of Dealer's
partners, directors, officers, employees, and agents adequate to reasonably
protect and indemnify the Distributor and the Funds against any loss which any
party may suffer or incur, directly or indirectly, as a result of any action by
Dealer or Dealer's partners, directors, officers, employees, and agents.
m. Dealer agrees that it will maintain the required net
capital as specified by the rules and regulations of the SEC, NASD and other
regulatory authorities.
4. DEALER COMPENSATION
a. On each purchase of Shares by Dealer from Distributor,
the total sales charges and dealer concessions or commissions, if any, payable
to Dealer shall be as stated on Schedule A to this Agreement, which may be
amended by Distributor from time to time. Distributor reserves the right,
without prior notice, to suspend or eliminate such dealer concession or
commissions by amendment, sticker or supplement to the then current Prospectus
for each Fund. Such sales charges and dealer concessions or commissions, are
subject to reduction under a variety of circumstances as described in each
Fund's then current Prospectus. For an investor to obtain any reduction,
Distributor must be notified at the time of the sale that the sale qualifies for
the reduced sales charge. If Dealer fails to notify Distributor of the
applicability of a reduction in the sales charge at the time the trade is
placed, neither Distributor nor any Fund will be liable for amounts necessary to
reimburse any investor for the reduction that should have been effected. Dealer
acknowledges that no sales charge or concession or commission will be paid to
Dealer on the reinvestment of dividends or capital gains reinvestment or on
Shares acquired in exchange for Shares of another Fund, or class thereof, having
the same sales charge structure as the Fund, or class thereof, from which the
exchange was made, in accordance with the Prospectus.
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b. In accordance with the Funds' Prospectuses, Distributor
or any affiliate may, but is not obligated to, make payments to dealers from
Distributor's own resources as compensation for certain sales that are made at
net asset value ("Qualifying Sales"). If Dealer notifies Distributor of a
Qualifying Sale, Distributor may make a contingent advance payment up to the
maximum amount available for payment on the sale. If any of the Shares purchased
in a Qualifying Sale are redeemed within twelve (12) months of the end of the
month of purchase, Distributor shall be entitled to recover any advance payment
attributable to the redeemed Shares by reducing any account payable or other
monetary obligation Distributor may owe to Dealer or by making demand upon
Dealer for repayment in cash. Distributor reserves the right to withhold
advances to Dealer, if for any reason Distributor believes that it may not be
able to recover unearned advances from Dealer.
c. With respect to any Fund that offers Shares for which
distribution plans have been adopted under Rule 12b-1 under the Investment
Company Act of 1940, as amended ("Rule 12b-1 Plans"), Distributor also is
authorized to pay the Dealer continuing distribution and/or service fees, as
specified in Schedule A and the relevant Fund Prospectus, with respect to Shares
of any such Fund, to the extent that Dealer provides distribution, marketing,
administrative and other services and activities regarding the promotion of such
Shares and the maintenance of related shareholder accounts.
d. In connection with the receipt of distribution fees
and/or service fees under Rule 12b-1 Plans applicable to Shares purchased by
Dealer's customers, Distributor directs Dealer to provide enhanced shareholder
services such as: processing purchase and redemption transactions; establishing
shareholder accounts; and providing certain information and assistance with
respect to the Funds. (Redemption levels of shareholder accounts assigned to
Dealer will be considered in evaluating Dealer's continued ability to receive
payments of distribution and/or service fees.) In addition, Dealer agrees to
support Distributor's marketing efforts by, among other things, granting
reasonable requests for visits to Dealer's office by Distributor's wholesalers
and marketing representatives, including all Funds covered by a Rule 12b-1 Plan
on Dealer's "approved," "preferred" or other similar product lists, if
applicable, and otherwise providing satisfactory product, marketing and sales
support. Further, Dealer agrees to provide Distributor with supporting
documentation concerning the shareholder services provided, as Distributor may
reasonably request from time to time.
e. All Rule 12b-1 Plan distribution and/or servicing fees
shall be based on the value of Shares attributable to Dealer's customers and
eligible for such payment, and shall be calculated on the basis of and at the
rates set forth in the compensation schedule then in effect. Without prior
approval by a majority of the outstanding shares of a Fund, the aggregate annual
fees paid to Dealer pursuant to any Rule 12b-1 Plan shall not exceed the amounts
stated as the "annual maximums" in each Fund's Prospectus, which amount shall be
a specified percent of the value of the Fund's net assets held in Dealer's
customers' accounts that are eligible for payment pursuant to the Rule 12b-1
Plans (determined in the same manner as each Fund uses to compute its net assets
as set forth in its then current Prospectus).
f. The provisions of any Rule 12b-1 Plan between the Funds
and the Distributor shall control over this Agreement in the event of any
inconsistency. Each Rule 12b-1 Plan in effect on the date of this Agreement is
described in the relevant Fund's Prospectus. Dealer
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hereby acknowledges that all payments under Rule 12b-1 Plans are subject to
limitations contained in such Rule 12b-1 Plans and may be varied or discontinued
at any time.
5. REDEMPTIONS, REPURCHASES AND EXCHANGES
a. The Prospectus for each Fund describes the provisions
whereby the Fund, under all ordinary circumstances, will redeem Shares held by
shareholders on demand. Dealer agrees that it will not make any representations
to shareholders relating to the redemption of their Shares other than the
statements contained in the Prospectus and the underlying organizational
documents of the Fund, to which it refers, and that Dealer will pay as
redemption proceeds to shareholders the net asset value, minus any applicable
deferred sales charge or redemption fee, determined after receipt of the order
as discussed in the Prospectus.
b. Dealer agrees not to repurchase any Shares from its
customers at a price below that next quoted by the Fund for redemption or
repurchase, I.E., at the net asset value of such Shares, less any applicable
deferred sales charge, or redemption fee, in accordance with the Fund's
Prospectus. Dealer shall, however, be permitted to sell Shares for the account
of the customer or record owner to the Funds at the repurchase price then
currently in effect for such Shares and may charge the customer or record owner
a fair service fee or commission for handling the transaction, provided Dealer
discloses the fee or commission to the customer or record owner. Nevertheless,
Dealer agrees that it shall not under any circumstances maintain a secondary
market in such repurchased Shares.
c. Dealer agrees that, with respect to a redemption order
it has made, if instructions in proper form, including any outstanding
certificates, are not received by Distributor within the time customary or the
time required by law, the redemption may be canceled forthwith without any
responsibility or liability on Distributor's part or on the part of any Fund, or
Distributor, at its option, may buy the shares redeemed on behalf of the Fund,
in which latter case Distributor may hold Dealer responsible for any loss,
including loss of profit, suffered by Distributor resulting from Distributor's
failure to settle the redemption.
d. Dealer agrees that it will comply with any restrictions
and limitations on exchanges described in each Fund's Prospectus, including any
restrictions or prohibitions relating to frequent purchases and redemptions
(i.e., market timing).
6. MULTIPLE CLASSES OF SHARES
Distributor may, from time to time, provide Dealer with
written guidelines or standards relating to the sale or distribution of Funds
offering multiple classes of Shares with different sales charges and
distribution-related operating expenses.
7. FUND INFORMATION
a. Dealer agrees that neither it nor any of its partners,
directors, officers, employees, and agents is authorized to give any information
or make any representations concerning Shares of any Fund except those contained
in the Fund's then current Prospectus or in materials provided by Distributor.
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b. Distributor will supply to Dealer Prospectuses,
reasonable quantities of sales literature, sales bulletins, and additional sales
information as provided by Distributor. Dealer agrees to use only advertising or
sales material relating to the Funds that: (i) is supplied by Distributor, or
(ii) conforms to the requirements of all applicable laws or regulations of any
government or authorized agency having jurisdiction over the offering or sale of
Shares of the Funds and is approved in writing by Distributor in advance of its
use. Such approval may be withdrawn by Distributor in whole or in part upon
written notice to Dealer, and Dealer shall, upon receipt of such notice,
immediately discontinue the use of such sales literature, sales bulletins and
advertising. Dealer is not authorized to modify or translate any such materials
without Distributor's prior written consent.
8. SHARES
a. Distributor acts solely as agent for the Fund and
Distributor shall have no obligation or responsibility with respect to Dealer's
right to purchase or sell Shares in any state or jurisdiction.
b. Distributor shall periodically furnish Dealer with
information identifying the states or jurisdictions in which it is believed that
all necessary notice, registration or exemptive filings for Shares have been
made under applicable securities laws such that offers and sales of Shares may
be made in such states or jurisdictions. Distributor shall have no obligation to
make such notice, registration or exemptive filings with respect to Shares in
any state or jurisdiction.
c. Dealer agrees not to transact orders for Shares in
states or jurisdictions in which it has been informed that Shares may not be
sold or in which it and its personnel are not authorized to sell Shares.
d. Distributor shall have no responsibility, under the
laws regulating the sale of securities in the United States or any foreign
jurisdiction, with respect to the qualification or status of Dealer or Dealer's
personnel selling Fund Shares. Distributor shall not, in any event, be liable or
responsible for the issue, form, validity, enforceability and value of such
Shares or for any matter in connection therewith.
e. Dealer agrees that it will make no offers or sales of
Shares in any foreign jurisdiction, except with the express written consent of
Distributor.
9. INDEMNIFICATION
a. Dealer agrees to indemnify, defend and hold harmless
Distributor and the Funds and their predecessors, successors, and affiliates,
each current or former partner, officer, director, employee, shareholder or
agent and each person who controls or is controlled by Distributor from any and
all losses, claims, liabilities, costs, and expenses, including attorney fees,
that may be assessed against or suffered or incurred by any of them howsoever
they arise, and as they are incurred, which relate in any way to: (i) any
alleged violation of any statute or regulation (including without limitation the
securities laws and regulations of the United States or any state or foreign
country) or any alleged tort or breach of contract, related to the offer or sale
by Dealer of Shares of the Funds pursuant to this Agreement (except to the
extent that Distributor's negligence or failure to follow correct instructions
received from Dealer is the cause of such loss,
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claim, liability, cost or expense); (ii) any redemption or exchange pursuant to
instructions received from Dealer or its partners, affiliates, officers,
directors, employees or agents; or (iii) the breach by Dealer of any of its
representations and warranties specified herein or the Dealer's failure to
comply with the terms and conditions of this Agreement, whether or not such
action, failure, error, omission, misconduct or breach is committed by Dealer or
its predecessor, successor, or affiliate, each current or former partner,
officer, director, employee or agent and each person who controls or is
controlled by Dealer.
b. Distributor agrees to indemnify, defend and hold
harmless Dealer and its predecessors, successors and affiliates, each current or
former partner, officer, director, employee or agent, and each person who
controls or is controlled by Dealer from any and all losses, claims,
liabilities, costs and expenses, including attorney fees, that may be assessed
against or suffered or incurred by any of them which arise, and which relate to
any untrue statement of or omission to state a material fact contained in the
Prospectus or any written sales literature or other marketing materials provided
by the Distributor to the Dealer, required to be stated therein or necessary to
make the statements therein not misleading.
c. Dealer agrees to notify Distributor, within a
reasonable time, of any claim or complaint or any enforcement action or other
proceeding with respect to Shares offered hereunder against Dealer or its
partners, affiliates, officers, directors, employees or agents, or any person
who controls Dealer, within the meaning of Section 15 of the Securities Act of
1933, as amended.
d. Dealer further agrees promptly to send Distributor
copies of (i) any report filed pursuant to NASD Conduct Rule 3070, including,
without limitation quarterly reports filed pursuant to Rule 3070(c), (ii)
reports filed with any other self-regulatory organization in lieu of Rule 3070
reports pursuant to Rule 3070(e) and (iii) amendments to Dealer's Form BD.
e. Each party's obligations under these indemnification
provisions shall survive any termination of this Agreement.
10. TERMINATION; AMENDMENT
a. In addition to the automatic termination of this
Agreement specified in Section 1.c. of this Agreement, each party to this
Agreement may unilaterally cancel its participation in this Agreement by giving
thirty (30) days prior written notice to the other party. In addition, each
party to this Agreement may terminate this Agreement immediately by giving
written notice to the other party of that other party's material breach of this
Agreement. Such notice shall be deemed to have been given and to be effective on
the date on which it was either delivered personally to the other party or any
officer or member thereof, or was mailed postpaid or delivered to a telegraph
office for transmission to the other party's designated person at the addresses
shown herein or in the most recent NASD Manual.
b. This Agreement shall terminate immediately upon the
appointment of a Trustee under the Securities Investor Protection Act or any
other act of insolvency by Dealer.
c. The termination of this Agreement by any of the
foregoing means shall have no effect upon transactions entered into prior to the
effective date of termination and shall
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not relieve Dealer of its obligations, duties and indemnities specified in this
Agreement. A trade placed by Dealer subsequent to its voluntary termination of
this Agreement will not serve to reinstate the Agreement. Reinstatement, except
in the case of a temporary suspension of Dealer, will only be effective upon
written notification by Distributor.
d. This Agreement is not assignable or transferable and
will terminate automatically in the event of its "assignment," as defined in the
Investment Company Act of 1940, as amended and the rules, regulations and
interpretations thereunder. The Distributor may, however, transfer any of its
duties under this Agreement to any entity that controls or is under common
control with Distributor.
e. This Agreement may be amended by Distributor at any
time by written notice to Dealer. Dealer's placing of an order or accepting
payment of any kind after the effective date and receipt of notice of such
amendment shall constitute Dealer's acceptance of such amendment.
11. DISTRIBUTOR'S REPRESENTATIONS AND WARRANTIES
Distributor represents and warrants that:
a. It is a limited liability company duly organized and
existing and in good standing under the laws of the state of Delaware and is
duly registered or exempt from registration as a broker-dealer in all states and
jurisdictions in which it provides services as principal underwriter and
distributor for the Funds.
b. It is a member in good standing of the NASD.
c. It is empowered under applicable laws and by
Distributor's charter and by-laws to enter into this Agreement and perform all
activities and services of the Distributor provided for herein and that there
are no impediments, prior or existing, regulatory, self-regulatory,
administrative, civil or criminal matters affecting Distributor's ability to
perform under this Agreement.
d. All requisite actions have been taken to authorize
Distributor to enter into and perform this Agreement.
12. ADDITIONAL DEALER REPRESENTATIONS AND WARRANTIES
In addition to the representations and warranties found
elsewhere in this Agreement, Dealer represents and warrants that:
a. It is duly organized and existing and in good standing
under the laws of the state, commonwealth or other jurisdiction in which Dealer
is organized and that Dealer will not offer Shares of any Fund for sale in any
state or jurisdiction where such Shares may not be legally sold or where Dealer
is not qualified to act as a broker-dealer.
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b. It is empowered under applicable laws and by Dealer's
organizational documents to enter into this Agreement and perform all activities
and services of the Dealer provided for herein and that there are no
impediments, prior or existing, regulatory, self-regulatory, administrative,
civil or criminal matters affecting Dealer's ability to perform under this
Agreement.
c. All requisite actions have been taken to authorize
Dealer to enter into and perform this Agreement.
d. It is not, at the time of the execution of this
Agreement, subject to any enforcement or other proceeding with respect to its
activities under state or federal securities laws, rules or regulations.
13. SETOFF; DISPUTE RESOLUTION; GOVERNING LAW
a. Should any of Dealer's concession accounts with
Distributor have a debit balance, Distributor shall be permitted to offset and
recover the amount owed from any other account Dealer has with Distributor,
without notice or demand to Dealer. b. In the event of a dispute concerning any
provision of this Agreement, either party may require the dispute to be
submitted to binding arbitration under the commercial arbitration rules and
procedures of the NASD. The parties agree that, to the extent permitted under
such arbitration rules and procedures, the arbitrators selected shall be from
the securities industry. Judgment upon any arbitration award may be entered by
any state or federal court having jurisdiction.
c. This Agreement shall be governed and construed in
accordance with the laws of the state of New Jersey, not including any provision
which would require the general application of the law of another jurisdiction.
14. INVESTIGATIONS AND PROCEEDINGS
The parties to this Agreement agree to cooperate fully in any
securities regulatory investigation or proceeding or judicial proceeding with
respect to each's activities under this Agreement and promptly to notify the
other party of any such investigation or proceeding.
15. CAPTIONS
All captions used in this Agreement are for convenience only,
are not a party hereof, and are not to be used in construing or interpreting any
aspect hereof.
16. ENTIRE UNDERSTANDING
This Agreement contains the entire understanding of the
parties hereto with respect to the subject matter contained herein and
supersedes all previous agreements. This Agreement shall be binding upon the
parties hereto when signed by Dealer and accepted by Distributor.
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17. SEVERABILITY
Whenever possible, each provision of this Agreement shall be
interpreted in such manner as to be effective and valid under applicable law.
If, however, any provision of this Agreement is held under applicable law to be
invalid, illegal, or unenforceable in any respect, such provision shall be
ineffective only to the extent of such invalidity, and the validity, legality
and enforceability of the remaining provisions of this Agreement shall not be
affected or impaired in any way.
18. ENTIRE AGREEMENT
This Agreement contains the entire understanding of the
parties hereto with respect to the subject matter contained herein and
supersedes all previous agreements and/or understandings of the parties. This
Agreement shall be binding upon the parties hereto when signed by Dealer and
accepted by Distributor.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the day and year set forth below.
PRUDENTIAL INVESTMENT MANAGEMENT SERVICES LLC
By: ____________________________________
Name: ____________________________________
Title: ____________________________________
Date: ____________________________________
DEALER: ___________________________________
By: ___________________________________
(Signature)
Name: __________________________________
Title: __________________________________
Address: __________________________________
Telephone: ________________________________
NASD CRD # ________________________________
Prudential Dealer # _______________________
(Internal Use Only)
Date: __________________________________
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Prudential Government Securities Trust
Amended and Restated
Distribution and Service Plan
(Class A Shares)
----------------
Introduction
------------
The Distribution and Service Plan (the Plan) set forth below which is
designed to conform to the requirements of Rule 12b-1 under the Investment
Company Act of 1940 (the Investment Company Act) and Rule 2830 of the Conduct
Rules of the National Association of Securities Dealers, Inc. (NASD) has been
adopted by Prudential Government Securities Trust (the Fund) and by Prudential
Investment Management Services LLC, the Fund's distributor (the Distributor).
The Fund has entered into a distribution agreement pursuant to which
the Fund will employ the Distributor to distribute Class A shares issued by the
Fund (Class A shares). Under the Plan, the Fund intends to pay to the
Distributor, as compensation for its services, a distribution and service fee
with respect to Class A shares.
A majority of the Board of Directors/Trustees of the Fund, including a
majority of those Directors/Trustees who are not "interested persons" of the
Fund (as defined in the Investment Company Act) and who have no direct or
indirect financial interest in the operation of this Plan or any agreements
related to it (the Rule 12b-1 Directors/Trustees), have determined by votes cast
in person at a meeting called for the purpose of voting on this Plan that there
is a reasonable likelihood that adoption and continuation of this Plan will
benefit the Fund and its shareholders. Expenditures under this Plan by the Fund
for Distribution Activities (defined below) are primarily
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intended to result in the sale of Class A shares of the Fund within the meaning
of paragraph (a)(2) of Rule 12b-1 promulgated under the Investment Company Act.
The purpose of the Plan is to create incentives to the Distributor
and/or other qualified broker-dealers and their account executives to provide
distribution assistance to their customers who are investors in the Fund, to
defray the costs and expenses associated with the preparation, printing and
distribution of prospectuses and sales literature and other promotional and
distribution activities and to provide for the servicing and maintenance of
shareholder accounts.
The Plan
--------
The material aspects of the Plan are as follows:
1. Distribution Activities
-----------------------
The Fund shall engage the Distributor to distribute Class A shares of
the Fund and to service shareholder accounts using all of the facilities of the
Distributor's distribution network, including sales personnel and branch office
and central support systems, and also using such other qualified broker-dealers
and financial institutions as the Distributor may select, including Prudential
Securities Incorporated (Prudential Securities) and Pruco Securities Corporation
(Prusec). Services provided and activities undertaken to distribute Class A
shares of the Fund are referred to herein as "Distribution Activities."
2. Payment of Service Fee
----------------------
The Fund shall pay to the Distributor as compensation for providing
personal service and/or maintaining shareholder accounts a service fee of .25 of
1% per annum of the average daily net assets of the Class A shares (service
fee). The Fund shall
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calculate and accrue daily amounts payable by the Class A shares of the Fund
hereunder and shall pay such amounts monthly or at such other intervals as the
Board of Directors/Trustees may determine.
3. Payment for Distribution Activities
-----------------------------------
The Fund shall pay to the Distributor as compensation for its services
a distribution fee, together with the service fee (described in Section 2
hereof), of .30 of 1% per annum of the average daily net assets of the Class A
shares of the Fund for the performance of Distribution Activities. The Fund
shall calculate and accrue daily amounts payable by the Class A shares of the
Fund hereunder and shall pay such amounts monthly or at such other intervals as
the Board of Directors/Trustees may determine. Amounts payable under the Plan
shall be subject to the limitations of Rule 2830 of the NASD Conduct Rules.
Amounts paid to the Distributor by the Class A shares of the Fund will
not be used to pay the distribution expenses incurred with respect to any other
class of shares of the Fund except that distribution expenses attributable to
the Fund as a whole will be allocated to the Class A shares according to the
ratio of the sales of Class A shares to the total sales of the Fund's shares
over the Fund's fiscal year or such other allocation method approved by the
Board of Directors/Trustees. The allocation of distribution expenses among
classes will be subject to the review of the Board of Directors/Trustees.
The Distributor shall spend such amounts as it deems appropriate on
Distribution Activities which include, among others:
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(a) sales commissions and trailer commissions paid to, or on
account of, account executives of the Distributor;
(b) indirect and overhead costs of the Distributor associated with
Distribution Activities, including central office and branch
expenses;
(c) amounts paid to Prudential Securities or Prusec for performing
services under a selected dealer agreement between Prudential
Securities or Prusec and the Distributor for sale of Class A
shares of the Fund, including sales commissions, trailer
commissions paid to, or on account of, agents and indirect and
overhead costs associated with Distribution Activities;
(d) advertising for the Fund in various forms through any
available medium, including the cost of printing and mailing
Fund prospectuses, statements of additional information and
periodic financial reports and sales literature to persons
other than current shareholders of the Fund; and
(e) sales commissions (including trailer commissions) paid to, or
on account of, broker-dealers and financial institutions
(other than Prudential Securities or Prusec) which have
entered into selected dealer agreements with the Distributor
with respect to Class A shares of the Fund.
4. Quarterly Reports; Additional Information
-----------------------------------------
An appropriate officer of the Fund will provide to the Board of
Directors/Trustees of the Fund for review, at least quarterly, a written report
specifying in reasonable detail the amounts expended for Distribution Activities
(including payment of the service fee) and the purposes for which such
expenditures were made in compliance with the requirements of Rule 12b-1. The
Distributor will provide to the Board of Directors/Trustees of the Fund such
additional information as the Board shall from time to time reasonably request,
including information about Distribution Activities undertaken or to be
undertaken by the Distributor.
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The Distributor will inform the Board of Directors/Trustees of the Fund
of the commissions and account servicing fees to be paid by the Distributor to
account executives of the Distributor and to broker-dealers and financial
institutions which have selected dealer agreements with the Distributor.
5. Effectiveness; Continuation
---------------------------
The Plan shall not take effect until it has been approved by a vote of
a majority of the outstanding voting securities (as defined in the Investment
Company Act) of the Class A shares of the Fund.
If approved by a vote of a majority of the outstanding voting
securities of the Class A shares of the Fund, the Plan shall, unless earlier
terminated in accordance with its terms, continue in full force and effect
thereafter for so long as such continuance is specifically approved at least
annually by a majority of the Board of Directors/Trustees of the Fund and a
majority of the Rule 12b-1 Directors/Trustees by votes cast in person at a
meeting called for the purpose of voting on the continuation of the Plan.
6. Termination
-----------
This Plan may be terminated at any time by vote of a majority of the
Rule 12b-1 Directors/Trustees, or by vote of a majority of the outstanding
voting securities (as defined in the Investment Company Act) of the Class A
shares of the Fund.
7. Amendments
----------
The Plan may not be amended to change the combined service and
distribution fees to be paid as provided for in Sections 2 and 3 hereof so as to
increase materially the amounts payable under this Plan unless such amendment
shall be approved by the
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vote of a majority of the outstanding voting securities (as defined in the
Investment Company Act) of the Class A shares of the Fund. All material
amendments of the Plan shall be approved by a majority of the Board of
Directors/Trustees of the Fund and a majority of the Rule 12b-1
Directors/Trustees by votes cast in person at a meeting called for the purpose
of voting on the Plan.
8. Rule 12b-1 Directors/Trustees
-----------------------------
While the Plan is in effect, the selection and nomination of the
Directors/Trustees shall be committed to the discretion of the Rule 12b-1
Directors/Trustees.
9. Records
-------
The Fund shall preserve copies of the Plan and any related agreements
and all reports made pursuant to Section 4 hereof, for a period of not less than
six years from the date of effectiveness of the Plan, such agreements or
reports, and for at least the first two years in an easily accessible place.
Dated: June 1, 1998
6
PRUDENTIAL GOVERNMENT SECURITIES TRUST
(the Fund)
AMENDED AND RESTATED PLAN PURSUANT TO RULE 18F-3
The Fund hereby adopts this plan pursuant to Rule 18f-3 under the
Investment Company Act of 1940 (the 1940 Act), setting forth the separate
arrangement and expense allocation of each class of shares in the Fund. Any
material amendment to this plan is subject to prior approval of the Board of
Directors, including a majority of the independent Directors.
CLASS CHARACTERISTICS
CLASS A SHARES: Class A shares are subject to a high initial sales charge
and a distribution and/or service fee pursuant to Rule 12b-1
under the 1940 Act (Rule 12b-1 fee) not to exceed .30 of 1%
per annum of the average daily net assets of the class. The
initial sales charge is waived or reduced for certain
eligible investors.
Class Z SHARES: Class Z shares are not subject to either an initial or
contingent deferred sales charge, nor are they subject
to any Rule 12b-1 fee.
INCOME AND EXPENSE ALLOCATIONS
Income, any realized and unrealized capital gains and losses, and
expenses not allocated to a particular class of the Fund will be
allocated to each class of the Fund on the basis of the net asset value
of that class in relation to the net asset value of the Fund.
DIVIDENDS AND DISTRIBUTIONS
Dividends and other distributions paid by the Fund to each class of
shares, to the extent paid, will be paid on the same day and at the
same time, and will be determined in the same manner and will be in the
same amount, except that the amount of the dividends and other
distributions declared and paid by a particular class of the Fund may
be different from that paid by another class of the Fund because of
Rule 12b-1 fees and other expenses borne exclusively by that class.
EXCHANGE PRIVILEGE
<PAGE>
Holders of Class A Shares and Class Z Shares shall have such exchange
privileges as set forth in the Fund's current prospectus. Exchange
privileges may vary among classes and among holders of a Class.
GENERAL
A. Each class of shares shall have exclusive voting rights on any matter
submitted to shareholders that relates solely to its arrangement and
shall have separate voting rights on any matter submitted to
shareholders in which the interests of one class differ from the
interests of any other class.
B. On an ongoing basis, the Directors, pursuant to their fiduciary
responsibilities under the 1940 Act and otherwise, will monitor the
Fund for the existence of any material conflicts among the interests of
its several classes. The Directors Trustees, including a majority of
the independent Directors, shall take such action as is reasonably
necessary to eliminate any such conflicts that may develop. Prudential
Investments Fund Management LLC, the Fund's Manager, will be
responsible for reporting any potential or existing conflicts to the
Directors.
C. For purposes of expressing an opinion on the financial statements of
the Fund, the methodology and procedures for calculating the net asset
value and dividends/distributions of the Fund's several classes and the
proper allocation of income and expenses among such classes will be
examined annually by the Fund's independent auditors who, in performing
such examination, shall consider the factors set forth in the relevant
auditing standards adopted, from time to time, by the American
Institute of Certified Public Accountants.
Approved: August 26, 1998
Effective: October 28, 1998
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