<PAGE>
As filed with the Securities and Exchange Commission
on April _, 1994
Registration No. 2-76061
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /X/
PRE-EFFECTIVE AMENDMENT NO. / /
POST-EFFECTIVE AMENDMENT NO. 18 /X/
AND/OR
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 19 /X/
(Check appropriate box or boxes)
--------------
PRUDENTIAL-BACHE GNMA FUND, INC.
(Exact name of registrant as specified in charter)
(Doing business as Prudential GNMA Fund)
ONE SEAPORT PLAZA,
NEW YORK, NEW YORK 10292
(Address of Principal Executive Offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 214-1250
S. JANE ROSE, ESQ.
ONE SEAPORT PLAZA
NEW YORK, NEW YORK 10292
(NAME AND ADDRESS OF AGENT FOR SERVICE OF PROCESS)
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE
DATE OF THE REGISTRATION STATEMENT.
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE
(CHECK APPROPRIATE BOX):
/ / immediately upon filing pursuant to paragraph (b)
/ / on (date) pursuant to paragraph (a)
/X/ 60 days after filing pursuant to paragraph (a)
/ /_on (date) pursuant to paragraph (a), of Rule 485
Pursuant to Rule 24f-2 under the Investment Company Act of 1940, Registrant
has previously registered an indefinite number of shares of its Common Stock,
par value $.01 per share. The Registrant filed a notice under such Rule for its
fiscal year ended December 31, 1993 on February 28, 1993.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
CROSS REFERENCE SHEET
(AS REQUIRED BY RULE 495)
<TABLE>
<CAPTION>
N-1A ITEM NO. LOCATION
- ---------------------------------------------------- ----------------------------------------
<S> <C> <C> <C>
PART A
Item 1. Cover Page.............................. Cover Page
Item 2. Synopsis................................ Fund Expenses
Item 3. Condensed Financial Information......... Fund Expenses; Financial Highlights; How
the Fund Calculates Performance
Item 4. General Description of Registrant....... Cover Page; Fund Highlights; How the
Fund Invests; General Information
Item 5. Management of Fund...................... Financial Highlights; How the Fund is
Managed; General Information
Item 6. Capital Stock and Other Securities...... Taxes, Dividends and Distributions;
General Information
Item 7. Purchase of Securities Being Offered.... Shareholder Guide; How the Fund Values
its Shares
Item 8. Redemption or Repurchase................ Shareholder Guide; How the Fund Values
its Shares; General Information
Item 9. Pending Legal Proceedings............... Not Applicable
PART B
Item 10. Cover Page.............................. Cover Page
Item 11. Table of Contents....................... Table of Contents
Item 12. General Information and History......... Not Applicable
Item 13. Investment Objectives and Policies...... Investment Objective and Policies;
Investment Restrictions
Item 14. Management of the Fund.................. Directors and Officers; Manager;
Distributor
Item 15. Control Persons and Principal Holders of
Securities.............................. Not Applicable
Item 16. Investment Advisory and Other
Services................................ Manager; Distributor; Custodian,
Transfer and Dividend Disbursing Agent
and Independent Accountants
Item 17. Brokerage Allocation and Other
Practices............................... Portfolio Transactions and Brokerage
Item 18. Capital Stock and Other Securities...... Not Applicable
Item 19. Purchase, Redemption and Pricing of
Securities Being Offered................ Purchase and Redemption of Fund Shares;
Shareholder Investment Account; Net
Asset Value
Item 20. Tax Status.............................. Dividends, Distributions and Taxes
Item 21. Underwriters............................ Distributor
Item 22. Calculation of Performance Data......... Performance Information
Item 23. Financial Statements.................... Financial Statements
PART C
Information required to be included in Part C is set forth under the appropriate Item,
so numbered, in Part C to this Post-Effective Amendment to the Registration Statement.
</TABLE>
<PAGE>
Prudential GNMA Fund, Inc.
- --------------------------------------------------------------------------------
Prospectus dated ____________, 1994
- --------------------------------------------------------------------------------
Prudential GNMA Fund, Inc. (the Fund) is an open-end, diversified management
investment company whose investment objective is to achieve a high level of
income over the long term consistent with providing reasonable safety in the
value of each shareholder's investment. In pursuing this objective, the Fund
will invest primarily in mortgage-backed securities guaranteed as to timely
payment of principal and interest by the Government National Mortgage
Association (GNMA) and other readily marketable fixed-income securities. The
Fund may also write covered call and put options on U.S. Government securities
and enter into closing purchase and sale transactions with respect to certain of
such options. To hedge against changes in interest rates, the Fund may also
purchase put options and engage in transactions involving interest rate futures
contracts and options on such contracts and engage in interest rate swap
transactions. See "How the Fund Invests--Investment Objective and Policies." The
Fund's address is One Seaport Plaza, New York, New York 10292, and its telephone
number is (800) 225-1852.
This Prospectus sets forth concisely the information about the Fund that a
prospective investor ought to know before investing. Additional information
about the Fund has been filed with the Securities and Exchange Commission in a
Statement of Additional Information, dated ________, 1994 which information is
incorporated herein by reference (is legally considered to be a part of this
Prospectus) and is available without charge upon request to the Fund at the
address or telephone number noted above.
- --------------------------------------------------------------------------------
INVESTORS ARE ADVISED TO READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE
REFERENCE.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
FUND HIGHLIGHTS
The following summary is intended to highlight certain information contained
in this Prospectus and is qualified in its entirety by the more detailed
information appearing elsewhere herein.
WHAT IS PRUDENTIAL GNMA FUND, INC.?
Prudential GNMA Fund, Inc. is a mutual fund. A mutual fund pools the resources
of investors by selling its shares to the public and investing the proceeds of
such sale in a portfolio of securities designed to achieve its investment
objective. Technically, the Fund is an open-end, diversified management
investment company.
WHAT IS THE FUND'S INVESTMENT OBJECTIVE?
The Fund's investment objective is to achieve a high level of income over the
long term consistent with providing reasonable safety in the value of each
shareholder's investment. It seeks to achieve this objective by investing
primarily in mortgage-backed securities guaranteed as to timely payment of
principal and interest by the Government National Mortgage Association (GNMA)
and other readily marketable fixed-income securities. See "How the Fund
Invests--Investment Objective and Policies" at page 7.
WHAT ARE THE FUND'S SPECIAL CHARACTERISTICS AND RISKS?
In seeking to achieve its investment objective, the Fund may also write
covered call and put options on U.S. Government securities and enter into
closing purchase and sale transactions with respect to certain of such options.
To hedge against changes in interest rates, the Fund may also purchase put
options and engage in transactions involving interest rate futures contracts and
options on such contracts and engage in interest rate swap transactions. See
"How the Fund Invests--Investment Objective and Policies" at page 7.
WHO MANAGES THE FUND?
Prudential Mutual Fund Management, Inc. (PMF or the Manager) is the Manager of
the Fund and is compensated for its services at an annual rate of .50 of 1% of
the Fund's average daily net assets. As of March 31, 1994, PMF served as manager
or administrator to 66 investment companies, including 37 mutual funds, with
aggregate assets of approximately $51 billion. The Prudential Investment
Corporation (PIC or the Subadviser) furnishes investment advisory services in
connection with the management of the Fund under a Subadvisory Agreement with
PMF. See "How the Fund is Managed--Manager" at page 13.
WHO DISTRIBUTES THE FUND'S SHARES?
Prudential Mutual Fund Distributors, Inc. (PMFD) acts as the Distributor of
the Fund's Class A shares and is currently paid for its services at an annual
rate of .15 of 1% of the average daily net assets of the Class A shares.
Prudential Securities Incorporated (Prudential Securities or PSI), a major
securities underwriter and securities and commodities broker, acts as the
Distributor of the Fund's Class B and Class C shares and is paid for its
services at an annual rate of .75 of 1% of the average daily net assets of each
of the Class B and Class C shares. See "How the Fund is Managed--Distributor" at
page 13.
2
<PAGE>
WHAT IS THE MINIMUM INVESTMENT?
The minimum initial investment for Class A and Class B shares is $1,000 per
class and $5,000 for Class C shares. The minimum subsequent investment is $100
for all classes. There is no minimum investment requirement for certain
retirement and employee savings plans or custodial accounts for the benefit of
minors. For purchases made through the Automatic Savings Accumulation Plan, the
minimum initial and subsequent investment is $50. See "Shareholder Guide--How to
Buy Shares of the Fund" at page 19 and "Shareholder Guide--Shareholder Services"
at page 26.
HOW DO I PURCHASE SHARES?
You may purchase shares of the Fund through Prudential Securities, Pruco
Securities Corporation (Prusec) or directly from the Fund, through its transfer
agent, Prudential Mutual Fund Services, Inc. (PMFS or the Transfer Agent) at the
net asset value per share (NAV) next determined after receipt of your purchase
order by the Transfer Agent or Prudential Securities plus a sales charge which
may be imposed either (i) at the time of purchase (Class A shares) or (ii) on a
deferred basis (Class B or Class C shares). See "How the Fund Values Its Shares"
at page 15 and "Shareholder Guide--How to Buy Shares of the Fund" at page 19.
WHAT ARE MY PURCHASE ALTERNATIVES?
The Fund offers three classes of shares:
<TABLE>
<S> <C>
- - Class A Shares: Sold with an initial sales charge of up to 4% of the
offering price.
- - Class B Shares: Sold without an initial sales charge but are subject to a
contingent deferred sales charge or CDSC (declining from 5%
to zero of the lower of the amount invested or the
redemption proceeds) which will be imposed on certain
redemptions made within six years of purchase. Although
Class B shares are subject to higher ongoing
distribution-related expenses than Class A shares, Class B
shares will automatically convert to Class A shares (which
are subject to lower ongoing expenses) approximately seven
years after purchase.
- - Class C Shares: Sold without an initial sales charge and for one year after
purchase, are subject to a 1% CDSC on redemptions. Like
Class B shares, Class C shares are subject to higher ongoing
distribution-related expenses than Class A shares but do not
convert to another class.
</TABLE>
See "Shareholder Guide--Alternative Purchase Plan" at page 19.
HOW DO I SELL MY SHARES?
You may redeem your shares at any time at the NAV next determined after
Prudential Securities or the Transfer Agent receives your sell order. However,
the proceeds of redemptions of Class B and Class C shares may be subject to a
CDSC. See "Shareholder Guide--How to Sell Your Shares" at page 22.
HOW ARE DIVIDENDS AND DISTRIBUTIONS PAID?
The Fund expects to declare daily and pay monthly dividends of net investment
income and make distributions of net capital gains, if any, at least annually.
Dividends and distributions will be automatically reinvested in additional
shares of the Fund at NAV without a sales charge unless you request that they be
paid to you in cash. See "Taxes, Dividends and Distributions" at page 16.
3
<PAGE>
FUND EXPENSES
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES+ CLASS A SHARES CLASS B SHARES
-------------- -----------------------------
<S> <C> <C>
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price)..... 4% None
Maximum Sales Load or Deferred Sales Load
Imposed on Reinvested Dividends......... None None
Deferred Sales Load (as a percentage of
original purchase price or redemption
proceeds, whichever is lower)........... None 5% during the first year,
decreasing by 1% annually to
1% in the fifth and sixth
years and 0% the seventh
year*
Redemption Fees.......................... None None
Exchange Fees............................ None None
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS) CLASS A SHARES CLASS B SHARES
-------------- -----------------------------
<S> <C> <C>
0.50% 0.50%
Management Fees..........................
0.15++ 0.75
12b-1 Fees+..............................
0.35 0.35
Other Expenses...........................
--- ---
Total Fund Operating Expenses............ 1.00% 1.60%
--- ---
--- ---
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES+ CLASS C SHARES
-----------------------------
<S> <C>
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price)..... None
Maximum Sales Load or Deferred Sales Load
Imposed on Reinvested Dividends......... None
Deferred Sales Load (as a percentage of
original purchase price or redemption
proceeds, whichever is lower)........... 1% on redemptions made within
one year of purchase
Redemption Fees.......................... None
Exchange Fees............................ None
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS) CLASS C SHARES**
-----------------------------
<S> <C>
0.50%
Management Fees..........................
0.75++
12b-1 Fees+..............................
0.35
Other Expenses...........................
---
Total Fund Operating Expenses............ 1.60%
---
---
</TABLE>
<TABLE>
<CAPTION>
EXAMPLE 1 3 5 10
YEAR YEARS YEARS YEARS
----- ----- ----- -----
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment,
assuming (1) 5% annual return and (2) redemption at the end
of each time period:
Class A................................................... $ 50 $ 71 $ 93 $158
Class B................................................... $ 66 $ 80 $ 97 166
Class C**................................................. $ 26 $ 50 $ 87 $190
You would pay the following expenses on the same investment,
assuming no redemption:
Class A................................................... $ 50 $ 71 $ 93 $158
Class B................................................... $ 16 $ 50 $ 87 $166
Class C**................................................. $ 16 $ 50 $ 87 $190
The above example with respect to Class A and Class B shares is based on restated data for the
Fund's fiscal year ended December 31, 1993. The above example with respect to Class C shares is
based on expenses expected to have been incurred if Class C shares had been in existence during
the fiscal year ended December 31, 1993. THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF
PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
The purpose of this table is to assist investors in understanding the various costs and
expenses that an investor in the Fund will bear, whether directly or indirectly. For more complete
descriptions of the various costs and expenses, see "How the Fund is Managed." "Other Expenses"
includes an estimate of operating expenses of the Fund, such as directors' and professional fees,
registration fees, reports to shareholders, transfer agency, custodian fees and franchise taxes.
<FN>
- ------------------------------
* Class B shares will automatically convert to Class A shares approximately
seven years after purchase. See "Shareholder Guide--Conversion Feature--Class
B Shares."
** Estimated based on expenses expected to have been incurred if Class C shares
had been in existence during the fiscal year ended December 31, 1993.
+ Pursuant to rules of the National Association of Securities Dealers, Inc.,
the aggregate initial sales charges, deferred sales charges and asset-based
sales charges on shares of the Fund may not exceed 6.25% of total gross
sales, subject to certain exclusions. This 6.25% limitation is imposed on the
Fund rather than on a per shareholder basis. Therefore, long-term Class B and
Class C shareholders of the Fund may pay more in total sales charges than the
economic equivalent of 6.25% of such shareholders' investment in such shares.
See "How the Fund is Managed--Distributor."
++ Although the Class A and Class C Distribution and Service Plans provide that
the Fund may pay a distribution fee of up to .30 of 1% and 1% per annum of
the average daily net assets of the Class A and Class C shares, respectively,
the Distributor has agreed to limit its distribution expenses with respect to
Class A and Class C shares of the Fund to no more than .15 of 1% and .75 of
1% of the average daily net assets of the Class A and Class C shares,
respectively, for the fiscal year ending December 31, 1994. See "How the Fund
is Managed--Distributor."
</TABLE>
4
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE INDICATED PERIODS)
(CLASS A SHARES)
The following financial highlights have been been audited by Price
Waterhouse, independent accountants, whose report thereon was unqualified.
This information should be read in conjunction with the financial statements
and notes thereto, which appear in the Statement of Additional Information.
The following financial highlights contain selected data for a share of Class
A common stock outstanding, total return, ratios to average net assets and
other supplemental data for the periods indicated. The information is based on
data contained in the financial statements. No Class C shares were outstanding
during the periods indicated.
<TABLE>
<CAPTION>
CLASS A
-----------------------------------------------
JANUARY 22,
1990*
THROUGH
YEAR ENDED DECEMBER 31, DECEMBER
-------------------------------- 31,
1993 1992 1991 1990
-------- -------- -------- -----------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.... $ 15.07 $ 15.30 $ 14.84 $ 14.73++
INCOME FROM INVESTMENT OPERATIONS.......
Net investment income................... .95 1.10 1.14 1.17
Net realized and unrealized gain (loss)
on investment transactions............. (.21) (.15) .61 .13
Total from investment operations...... .74 .95 1.75 1.32++
LESS DISTRIBUTIONS......................
Dividends to shareholders from net
investment income...................... (.95) (1.10) (1.14) (1.17)
Dividends to shareholders in excess of
net investment income.................. (.11) (.08) (.15) (.04)
Total distributions................... (1.06) (1.18) (1.29) (1.21)
Net asset value, end of period.......... $ 14.75 $ 15.07 $ 15.30 $ 14.84
TOTAL RETURN@:.......................... 4.97% 6.42% 12.48% 9.41%++
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)......... $10,863 $ 9,045 $ 6,268 $ 1,604
Average net assets (000)................ $10,199 $ 6.651 $ 3,035 $ 756
Ratios to average net assets:
Expenses, including distribution
fees................................. 1.00% 1.00% 1.11% 1.15%+
Expenses, excluding distribution
fees................................. .85% .85% .96% .99%+
Net investment income................. 6.42% 7.26% 7.81% 9.16%+
Portfolio turnover...................... 134% 33% 118% 481%
<FN>
- --------------------------
* Commencement of offering of Class A shares.
+ Annualized.
++ Restated.
@ Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
</TABLE>
5
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE INDICATED PERIODS)
(CLASS B SHARES)
The following financial highlights, with respect to the five-year period
ended December 31, 1993, have been audited by Price Waterhouse, independent
accountants, whose report thereon was unqualified. This information should be
read in conjunction with the financial statements and notes thereto, which
appear in the Statement of Additional Information. The following financial
highlights contain selected data for a share of Class B common stock
outstanding, total return, ratios to average net assets and other supplemental
data for the periods indicated. The information is based on data contained in
the financial statements. No Class C shares were outstanding during the
periods indicated.
<TABLE>
<CAPTION>
CLASS B
-------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------------------------------
1993 1992 1991 1990 1989 1988# 1987 1986 1985 1984
-------- -------- -------- -------- -------- ------------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning
of period......... $15.04 $15.27 $14.81 $14.86 $14.29 $ 14.76 $15.94 $15.94 $14.99 $14.75
-------- -------- -------- -------- -------- ------------- -------- -------- -------- --------
INCOME FROM
INVESTMENT
OPERATIONS:
Net investment
income............ .87 1.02 1.06 1.15 1.19 1.17 1.14 1.13 1.36 1.53+
Net realized and
unrealized
gain (loss) on
investment
transactions...... (.23) (.16) .60 (.01) .59 (.48) (.98) .48 1.15 .27
-------- -------- -------- -------- -------- ------------- -------- -------- -------- --------
Total from
investment
operations...... .64 .86 1.66 1.14 1.78 .69 .16 1.61 2.51 1.80
-------- -------- -------- -------- -------- ------------- -------- -------- -------- --------
LESS DISTRIBUTIONS:
Dividends to
shareholders from
net investment
income............ (.87) (1.02) (1.06) (1.15) (1.19) (1.16) (1.14) (1.18) (1.36) (1.56)
Distributions to
shareholders from
net realized gain
on investment
transactions...... -- -- -- -- -- -- (.20) (.43) (.20) --
Dividends to
shareholders in
excess of net
investment
income............ (.10) (.07) (.14) (.04) (.02) -- -- -- -- --
-------- -------- -------- -------- -------- ------------- -------- -------- -------- --------
Total
distributions... (.97) (1.09) (1.20) (1.19) (1.21) (1.16) (1.34) (1.61) (1.56) (1.56)
-------- -------- -------- -------- -------- ------------- -------- -------- -------- --------
Net asset value,
end of period..... $14.71 $15.04 $15.27 $14.81 $14.86 $ 14.29 $14.76 $15.94 $15.94 $14.99
-------- -------- -------- -------- -------- ------------- -------- -------- -------- --------
-------- -------- -------- -------- -------- ------------- -------- -------- -------- --------
TOTAL RETURN@:..... 4.29% 5.80% 11.82% 8.10% 12.93% 4.80% 1.10% 10.64% 17.76% 13.19%
RATIOS/SUPPLEMENTAL
DATA:
Net assets, end of
period (000)...... $319,401 $325,969 $272,661 $226,605 $221,938 $236,626 $263,914 $284,421 $103,749 $30,137
Average net assets
(000)............. $332,731 $295,255 $243,749 $218,749 $223,251 $252,814 $278,475 $254,992 $43,729 $26,234
Ratios to average
net assets:
Expenses,
including
distribution
fees............ 1.60% 1.60% 1.71% 1.74% 1.56% 1.52% 1.65% 1.39% 1.35% 1.65%+
Expenses,
excluding
distribution
fees............ .85% .85% .96% .99% .98% .91% 1.01% .80% 1.24% 1.65%+
Net investment
income.......... 5.82% 6.66% 7.21% 7.96% 8.16% 7.83% 7.17% 7.21% 8.71% 10.57%+
Portfolio
turnover.......... 134% 33% 118% 481% 200% 216% 331% 254% 222% 10%*
<FN>
- ----------------------------------
# On May 2, 1988, Prudential Mutual Fund Management, Inc. succeeded The
Prudential Insurance Company of America as investment adviser and since then
has acted as manager of the Fund. See "Manager" in the Statement of
Additional Information.
+ Net of expense reimbursement.
* Excludes turnover of U.S. Government securities.
@ Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions.
</TABLE>
6
<PAGE>
HOW THE FUND INVESTS
INVESTMENT OBJECTIVE AND POLICIES
THE FUND'S INVESTMENT OBJECTIVE IS TO ACHIEVE A HIGH LEVEL OF INCOME OVER THE
LONG TERM CONSISTENT WITH PROVIDING REASONABLE SAFETY IN THE VALUE OF EACH
SHAREHOLDER'S INVESTMENT. IN PURSUING THIS OBJECTIVE, THE FUND WILL INVEST
PRIMARILY IN READILY MARKETABLE FIXED-INCOME SECURITIES THAT PROVIDE ATTRACTIVE
YIELDS BUT DO NOT INVOLVE SUBSTANTIAL RISK OF LOSS OF CAPITAL THROUGH DEFAULT,
PRINCIPALLY MORTGAGE-BACKED SECURITIES ISSUED OR GUARANTEED BY AGENCIES OR
INSTRUMENTALITIES OF THE U.S. GOVERNMENT. THERE CAN BE NO ASSURANCE THAT SUCH
OBJECTIVE WILL BE ACHIEVED. SEE "INVESTMENT OBJECTIVE AND POLICIES" IN THE
STATEMENT OF ADDITIONAL INFORMATION.
It is expected that, under normal market conditions, at least 65% of the total
assets of the Fund will consist of GNMA securities. To a lesser extent, the Fund
may also write covered call or put options, purchase put options on U.S.
Government securities and enter into closing purchase and sale transactions with
respect to certain of such options and, solely for BONA FIDE hedging purposes,
enter into contracts with respect to interest rate futures relating to U.S.
Government securities and options on such securities.
THE FUND'S INVESTMENT OBJECTIVE IS A FUNDAMENTAL POLICY AND, THEREFORE, MAY
NOT BE CHANGED WITHOUT THE APPROVAL OF THE HOLDERS OF A MAJORITY OF THE FUND'S
OUTSTANDING VOTING SECURITIES AS DEFINED IN THE INVESTMENT COMPANY ACT OF 1940,
AS AMENDED (THE INVESTMENT COMPANY ACT). FUND POLICIES THAT ARE NOT FUNDAMENTAL
MAY BE MODIFIED BY THE BOARD OF DIRECTORS.
THE FUND MAY VARY THE PROPORTION OF ITS HOLDINGS OF LONG-AND SHORT-TERM DEBT
SECURITIES IN ORDER TO REFLECT ITS ASSESSMENT OF PROSPECTIVE CHANGES IN INTEREST
RATES EVEN IF SUCH ACTION MAY ADVERSELY AFFECT CURRENT INCOME. For example, if,
in the opinion of the investment adviser, interest rates generally are expected
to decline, the Fund may sell its shorter term securities and purchase longer
term securities in order to benefit from greater expected relative price
appreciation; the securities sold may have a higher current yield than those
being purchased. The success of this strategy will depend on the investment
adviser's ability to forecast changes in interest rates. Moreover, the Fund
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.
GNMA SECURITIES AND OTHER FIXED-INCOME OBLIGATIONS
THE GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA). GNMA is a wholly-owned
U.S. Government corporation within the Department of Housing and Urban
Development. GNMA is authorized to guarantee, with the full faith and credit of
the U.S. Government, the timely payment of principal and interest on securities
issued by GNMA and backed by pools of FHA-insured or VA-guaranteed mortgages.
Interests in pools of mortgage-backed securities differ from other forms of debt
securities, which normally provide for periodic payments of interest in fixed
amounts with principal payments at maturity or specified call dates. GNMA
securities, which are described as "modified pass-through" securities, provide a
monthly payment which consists of both interest and principal payments owed on
the mortgage pool, net of certain fees, regardless of whether or not the
mortgagor actually makes the payment.
Because the prepayment characteristics of the underlying mortgages vary, it is
not possible to predict accurately the average life of a particular issue of
pass-through certificates. Mortgage-backed securities are often subject to more
rapid repayment than their stated maturity date would indicate as a result of
the pass-through of prepayments of principal on the underlying mortgage
7
<PAGE>
obligations. During periods of declining interest rates, prepayment of mortgages
underlying mortgage-backed securities can be expected to accelerate.
Accordingly, the Fund's ability to maintain positions in high-yielding
mortgage-backed securities will be affected by reductions in the principal
amount of such securities resulting from such prepayments, and its ability to
reinvest the returns of principal at comparable yields is subject to generally
prevailing interest rates at that time. The Fund's net asset value will vary
with changes in the values of the Fund's portfolio securities. Such values will
vary with changes in market interest rates generally and the differentials in
yields among various kinds of U.S. Government securities. See "Investment
Objective and Policies--GNMA Securities" in the Statement of Additional
Information.
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 "Investment Objective and Policies--GNMA
Certificates" in the Statement of Additional Information. The investment adviser
will seek to minimize this risk by investing in mortgage-backed securities rated
at least "A" by Moody's Investors Service, Inc. (Moody's) and Standard & Poor's
Corporation (S&P).
The Fund 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 mortgage assets, and a rapid rate of principal payments may
have a material adverse effect on yield to maturity. If the underlying mortgage
assets experience greater than anticipated prepayments of principal, the Fund
may not fully recoup its initial investment in these securities. Conversely, if
the underlying mortgage assets experience less than anticipated prepayments of
principal, the yield on POs could be materially adversely affected.
OTHER FIXED-INCOME OBLIGATIONS. IN ADDITION TO GNMA SECURITIES, THE FUND MAY
INVEST IN OTHER MORTGAGE-BACKED SECURITIES AND U.S. GOVERNMENT AND CORPORATE
BONDS, NOTES AND DEBENTURES AND MONEY MARKET INSTRUMENTS WHICH ARE RATED AT
LEAST Aa MOODY'S OR AA BY S&P OR, IF NOT SO RATED, WHICH ARE OF COMPARABLE
QUALITY IN THE OPINION OF THE FUND'S INVESTMENT ADVISER. The Fund may also
invest up to 20% of its assets in fixed-income securities which are rated A by
Moody's or S&P. See the Appendix to the Statement of Additional Information. The
value of fixed-income securities generally fluctuates with changes in the
creditworthiness of issuers and inversely with changes in interest rates. There
are risks in any investment, including fixed-income securities, and there can be
no assurance that the Fund will be able to achieve its investment objective.
Obligations issued or guaranteed as to principal and interest by the U.S.
Government may be acquired by the Fund in the form of custodial receipts that
evidence ownership of future interest payments, principal payments or both on
certain U.S. Treasury notes or bonds. Such notes and bonds are held in custody
by a bank on behalf of the owners. These custodial receipts are commonly
referred to as Treasury strips.
Other fixed-income obligations that the Fund may invest in include certain
U.S. dollar denominated debt securities of foreign issuers, provided that such
investments do not, in the judgment of the Fund's investment adviser, entail
substantial additional risk to the Fund. See "Investment Restrictions" in the
Statement of Additional Information. Securities of foreign issuers may involve
considerations and risks not present in domestic securities, such as the risk to
the issuer of nationalization, confiscation or other national restrictions.
There may be less information about foreign issuers publicly available than is
generally the case with respect to domestic issuers. Furthermore, foreign
issuers are not generally subject to uniform accounting, auditing and financial
reporting standards, practices and requirements comparable to those applicable
to domestic issuers.
The Fund may also purchase collateralized mortgage obligations (CMOs). A CMO
is a security issued by a corporation or a U.S. Government instrumentality which
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. CMOs are
partitioned into several classes with a ranked priority by which the classes of
obligations are redeemed. The Fund may invest in only those privately-issued
CMOs which are collateralized by mortgage-backed securities issued or
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<PAGE>
guaranteed by GNMA, Federal Home Loan Mortgage Corporation (FHLMC) or Federal
National Mortgage Association (FNMA) and in CMOs issued by any other agency or
instrumentality of the U.S. Government. CMOs issued by GNMA, FHLMC or FNMA are
considered U.S. Government securities for purposes of this Prospectus. In
reliance on rules and interpretations of the Securities and Exchange Commission
(the SEC), the Fund's investments in certain qualifying CMOs and REMICs are not
subject to the limitation of the Investment Company Act on acquiring interests
in other investment companies. To the extent the staff of the SEC considers the
issuer of a privately-issued CMO to be an "investment company," the Fund's
investment in all such CMOs and REMICs, together with securities issued by other
investment companies, will not exceed 5% of the Fund's total assets. See
"Investment Objective and Policies--Collateralized Mortgage Obligations" in the
Statement of Additional Information.
HEDGING AND INCOME ENHANCEMENT STRATEGIES
THE FUND ALSO MAY ENGAGE IN VARIOUS PORTFOLIO STRATEGIES TO REDUCE CERTAIN
RISKS OF ITS INVESTMENTS AND TO ATTEMPT TO ENHANCE INCOME, BUT NOT FOR
SPECULATION. These strategies currently include the use of options on U.S.
Government securities and futures contracts and options thereon. The Fund's
ability to use these strategies may be limited by market conditions, regulatory
limits and tax considerations, and there can be no assurance that any of these
strategies will succeed. See "Investment Objective and Policies--Interest Rate
Futures and Options Thereon" in the Statement of Additional Information. New
financial products and risk management techniques continue to be developed and
the Fund may use these new investments and techniques to the extent consistent
with its investment objective and policies.
OPTIONS TRANSACTIONS
THE FUND MAY PURCHASE AND WRITE (I.E., SELL) PUT AND CALL OPTIONS ON U.S.
GOVERNMENT SECURITIES THAT ARE TRADED ON NATIONAL SECURITIES EXCHANGES OR IN THE
OVER-THE-COUNTER MARKET WITH PRIMARY GOVERNMENT SECURITIES DEALERS RECOGNIZED BY
THE BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM TO ENHANCE INCOME OR TO
HEDGE THE FUND'S PORTFOLIO. The Fund may write covered put and call options to
generate additional income through the receipt of premiums, purchase put options
in an effort to protect the value of a security that it owns against a decline
in market value and purchase call options in an effort to protect against an
increase in price of securities it intends to purchase. The Fund may also
purchase put and call options to offset previously written put and call options
of the same series. See "Investment Objective and Policies--Option Writing and
Related Risks" in the Statement of Additional Information.
A CALL OPTION GIVES THE PURCHASER, IN EXCHANGE FOR A PREMIUM PAID, THE RIGHT
FOR A SPECIFIED PERIOD OF TIME TO PURCHASE THE SECURITIES SUBJECT TO THE OPTION
AT A SPECIFIED PRICE (THE "EXERCISE PRICE" OR "STRIKE PRICE"). The writer of a
call option, in return for the premium, has the obligation, upon exercise of the
option, to deliver, depending upon the terms of the option contract, the
underlying securities or a specified amount of cash to the purchaser upon
receipt of the exercise price. When the Fund writes a call option, the Fund
gives up the potential for gain on the underlying securities in excess of the
exercise price of the option during the period that the option is open.
A PUT OPTION GIVES THE PURCHASER, IN RETURN FOR A PREMIUM, THE RIGHT, FOR A
SPECIFIED PERIOD OF TIME, TO SELL THE SECURITIES SUBJECT TO THE OPTION TO THE
WRITER OF THE PUT AT THE SPECIFIED EXERCISE PRICE. The writer of the put option,
in return for the premium, has the obligation, upon exercise of the option, to
acquire the securities underlying the option at the exercise price. The Fund
might, therefore, be obligated to purchase the underlying securities for more
than their current market price.
THE FUND WILL WRITE ONLY "COVERED" OPTIONS. An option is covered if, so long
as the Fund is obligated under the option, it owns an offsetting position in the
underlying security or maintains cash, U.S. Government securities or other
liquid high-grade debt obligations with a value sufficient at all times to cover
its obligations in a segregated account. See "Investment Objective and
Policies--Option Writing and Related Risks" in the Statement of Additional
Information.
THERE IS NO LIMITATION ON THE AMOUNT OF CALL OPTIONS THE FUND MAY WRITE. THE
FUND WILL NOT PURCHASE AN OPTION IF, AS A RESULT OF SUCH PURCHASE, MORE THAN 10%
OF ITS TOTAL ASSETS WOULD BE INVESTED IN PREMIUMS FOR OPTIONS.
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<PAGE>
FUTURES CONTRACTS AND OPTIONS THEREON
THE FUND MAY PURCHASE AND SELL FINANCIAL FUTURES CONTRACTS AND OPTIONS THEREON
WHICH ARE TRADED ON A COMMODITIES EXCHANGE OR BOARD OF TRADE FOR CERTAIN
HEDGING, RETURN ENHANCEMENT AND RISK MANAGEMENT PURPOSES IN ACCORDANCE WITH
REGULATIONS OF THE COMMODITY FUTURES TRADING COMMISSION. These futures contracts
and options thereon will be on financial indices (including futures linked to
the London Interbank offered rate) and U.S. Government securities.
A FINANCIAL FUTURES CONTRACT IS AN AGREEMENT TO PURCHASE OR SELL AN AGREED
AMOUNT OF SECURITIES AT A SET PRICE FOR DELIVERY IN THE FUTURE.
THE FUND MAY NOT PURCHASE OR SELL FUTURES CONTRACTS OR OPTIONS THEREON FOR
RETURN ENHANCEMENT OR RISK MANAGEMENT PURPOSES IF IMMEDIATELY THEREAFTER THE SUM
OF THE AMOUNT OF INITIAL MARGIN DEPOSITS ON THE FUND'S FUTURES POSITIONS AND
PREMIUMS PAID FOR OPTIONS THEREON WOULD EXCEED 5% OF THE LIQUIDATION VALUE OF
THE FUND'S TOTAL ASSETS. THE FUND MAY PURCHASE AND SELL FUTURES CONTRACTS AND
OPTIONS THEREON FOR BONA FIDE HEDGING PURPOSES WITHOUT LIMITATION. ALTHOUGH
THERE ARE NO OTHER LIMITS APPLICABLE TO FUTURES CONTRACTS, THE VALUE OF ALL
FUTURES CONTRACTS SOLD WILL NOT EXCEED THE TOTAL MARKET VALUE OF THE FUND'S
PORTFOLIO.
THE FUND'S SUCCESSFUL USE OF FUTURES CONTRACTS AND OPTIONS THEREON DEPENDS
UPON THE INVESTMENT ADVISER'S ABILITY TO PREDICT THE DIRECTION OF THE MARKET AND
IS SUBJECT TO VARIOUS ADDITIONAL RISKS. The correlation between movements in the
price of a futures contract and the price of the securities being hedged is
imperfect and there is a risk that the value of the securities being hedged may
increase or decrease at a greater rate than the related futures contract
resulting in losses to the Fund. Certain futures exchanges or boards of trade
have established daily limits on the amount that the price of a futures contract
or option thereon may vary, either up or down, from the previous day's
settlement price. These daily limits may restrict the Fund's ability to purchase
or sell certain futures contracts or options thereon on any particular day.
THE FUND'S ABILITY TO ENTER INTO FUTURES CONTRACTS AND OPTIONS THEREON IS
LIMITED BY THE REQUIREMENTS OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED
(THE INTERNAL REVENUE CODE), FOR QUALIFICATION AS A REGULATED INVESTMENT
COMPANY. SEE "INVESTMENT OBJECTIVE AND POLICIES--INTEREST RATE FUTURES AND
OPTIONS THEREON" AND "TAXES" IN THE STATEMENT OF ADDITIONAL INFORMATION.
SPECIAL RISKS OF HEDGING AND INCOME ENHANCEMENT STRATEGIES
PARTICIPATION IN THE OPTIONS AND FUTURES MARKETS INVOLVES INVESTMENT RISKS AND
TRANSACTION COSTS TO WHICH THE FUND WOULD NOT BE SUBJECT ABSENT THE USE OF THESE
STRATEGIES. If the investment adviser's prediction of movements in the direction
of the securities and interest rate markets are inaccurate, the adverse
consequences to the Fund may leave the Fund in a worse position than if such
strategies were not used. Risks inherent in the use of options and futures
contracts and options on futures contracts include (1) dependence on the
investment adviser's ability to predict correctly movements in the direction of
interest rates and securities prices; (2) imperfect correlation between the
price of options and futures contracts and options thereon and movements in the
prices of the securities being hedged; (3) the fact that skills needed to use
these strategies are different from those needed to select portfolio securities;
(4) the possible absence of a liquid secondary market for any particular
instrument at any time; and (5) the possible need to defer closing out certain
hedged positions to avoid adverse tax consequences. See "Taxes" in the Statement
of Additional Information.
OTHER CONSIDERATIONS
ILLIQUID SECURITIES
The Fund may invest up to 15% of its net assets in illiquid securities,
including repurchase agreements which have a maturity of longer than seven days,
securities with legal or contractual restrictions on resale (restricted
securities) and securities that are not readily marketable. Restricted
securities eligible for resale pursuant to Rule 144A under the Securities Act of
1933, as
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<PAGE>
amended (the Securities Act) and certain commercial paper that have a readily
available market are not considered illiquid for purposes of this limitation.
The investment adviser will monitor the liquidity of such restricted securities
under the supervision of the Board of Directors. Repurchase agreements subject
to demand are deemed to have a maturity equal to the applicable notice period.
The staff of the SEC has taken the position that purchased over-the-counter
options and the assets used as "cover" for written over-the-counter options are
illiquid securities unless the Fund and the counterparty have provided for the
Fund, at the Fund's election, to unwind the over-the-counter option. The
exercise of such an option ordinarily would involve the payment by the Fund of
an amount designed to reflect the counterparty's economic loss from an early
termination, but does allow the Fund to treat the assets used as "cover" as
"liquid."
OTHER INVESTMENTS AND POLICIES
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES
The Fund may purchase or sell securities on a when-issued or delayed delivery
basis. When-issued or delayed delivery transactions arise when securities are
purchased or sold by the Fund with payment and delivery taking place in the
future in order to secure what is considered to be an advantageous price and
yield to the Fund at the time of entering into the transaction. The Fund's
Custodian will maintain, in a segregated account of the Fund, cash, U.S.
Government securities or other liquid high-grade debt obligations having a value
equal to or greater than the Fund's purchase commitments; the Custodian will
likewise segregate securities sold on a delayed delivery basis. The value of
securities so purchased are subject to market fluctuation and no interest
accrues to the purchaser during the period between purchase and settlement. At
the time of delivery of the securities the value may be more or less than the
purchase price and an increase in the percentage of the Fund's assets committed
to the purchase of securities on a when-issued or delayed delivery basis may
increase the volatility of the Fund's net asset value.
REPURCHASE AGREEMENTS
The Fund may on occasion enter into repurchase agreements, whereby the seller
of a security agrees to repurchase that security from the Fund at a mutually
agreed-upon time and price. The period of maturity is usually quite short,
possibly overnight or a few days, although it may not be for a number of months.
The resale price is in excess of the purchase price, reflecting an agreed-upon
rate of return effective for the period of time the Fund's money is invested in
the repurchase agreement. The Fund's repurchase agreements will at all times be
fully collateralized in an amount at least equal to the purchase price including
accrued interest earned on the underlying securities. The instruments held as
collateral are valued daily, and as the value of instruments declines, the Fund
will require additional collateral in order to maintain its fully collateralized
position. If the seller defaults and the value of the collateral securing the
repurchase agreement declines, the Fund may incur a loss. The Fund participates
in a joint repurchase account with other investment companies managed by
Prudential Mutual Fund Management, Inc. pursuant to an order of the SEC. See
"Investment Objective and Policies--Repurchase Agreements" in the Statement of
Additional Information.
DOLLAR ROLLS
The Fund may enter into dollar rolls in which the Fund sells securities to be
issued and delivered in the current month and simultaneously contracts to
repurchase substantially similar (same type and coupon) securities on a
specified future date from the same party. During the roll period, the Fund
forgoes principal and interest paid on the securities. The Fund is compensated
by the difference between the current sales price and the forward price for the
future purchase (often referred to as the "drop") as well as by the interest
earned on the cash proceeds of the initial sale.
A "covered roll" is a specific type of dollar roll for which there is an
offsetting cash position or a cash equivalent security position which matures on
or before the forward settlement date of the dollar roll transaction. Dollar
rolls (other than covered rolls)
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<PAGE>
are considered borrowings by the Fund for purposes of the percentage limitations
applicable to borrowings. Covered rolls, however, are not treated as borrowings
or other senior securities and will be excluded from the calculation of the
Fund's borrowings and other senior securities.
The Fund will establish a segregated account with its Custodian in which it
will maintain cash, U.S. Government securities or other liquid, high-grade debt
obligations equal in value to its obligations in respect of dollar rolls.
SECURITIES LENDING
The Fund may lend its portfolio securities to brokers or dealers, banks or
other recognized institutional borrowers of securities, provided that the
borrower at all times maintains cash or equivalent collateral or secures a
letter of credit in favor of the Fund in an amount equal to at least 100% of the
market value of the securities loaned. During the time portfolio securities are
on loan, the borrower will pay the Fund an amount equivalent to any dividend or
interest paid on such securities and the Fund may invest the cash collateral and
earn additional income, or it may receive an agreed upon amount of interest
income from the borrower. See "Investment Objective and Policies--Lending of
Portfolio Securities" in the Statement of Additional Information.
BORROWING
The Fund may borrow an amount equal to no more than 20% of the value of its
total assets (calculated when the loan is made) from banks for temporary,
extraordinary or emergency purposes or for the clearance of transactions. The
Fund may pledge up to 20% of its total assets to secure these borrowings.
INTEREST RATE SWAPS
The Fund may enter into interest rate swaps. Interest rate swaps involve the
exchange by the Fund with another party of their respective commitments to pay
or receive interest (E.G., an exchange of floating rate payments for fixed rate
payments). The Fund expects to enter into these transactions primarily to
preserve a return or spread on a particular investment or portion of its
portfolio or to protect against any increase in the price of securities the Fund
anticipates purchasing at a later date. The Fund intends to use these
transactions as a hedge and not as a speculative investment. The risk of loss
with respect to interest rate swaps is limited to the net amount of interest
payments that the Fund is contractually obligated to make and will not exceed 5%
of the Fund's net assets.
When the Fund enters into interest rate swaps on other than a net basis, the
entire amount of the Fund's obligations, if any, with respect to such interest
rate swaps will be treated as illiquid. To the extent that the Fund enters into
interest rate swaps on a net basis, the net amount of the excess, if any, of the
Fund's obligations over its entitlements with respect to each interest rate swap
will be treated as illiquid.
See "Investment Objective and Policies--Interest Rate Transactions" in the
Statement of Additional Information.
INVESTMENT RESTRICTIONS
The Fund is subject to certain investment restrictions which, like its
investment objectives, constitute fundamental policies. Such fundamental
policies are those which cannot be changed without the approval of the holders
of a majority of the Fund's outstanding voting securities, as defined in the
Investment Company Act. See "Investment Restrictions" in the Statement of
Additional Information.
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<PAGE>
HOW THE FUND IS MANAGED
THE FUND HAS A BOARD OF DIRECTORS WHICH, IN ADDITION TO OVERSEEING THE ACTIONS
OF THE FUND'S MANAGER, SUBADVISER AND DISTRIBUTOR, AS SET FORTH BELOW, DECIDES
UPON MATTERS OF GENERAL POLICY. THE FUND'S MANAGER CONDUCTS AND SUPERVISES THE
DAILY BUSINESS OPERATIONS OF THE FUND. THE FUND'S SUBADVISER FURNISHES DAILY
INVESTMENT ADVISORY SERVICES.
For the fiscal year ended December 31, 1993, the Fund's total expenses as a
percentage of average net assets for the Fund's Class A and Class B shares were
1.00% and 1.60%, respectively. See "Financial Highlights." No Class C shares
were outstanding during the fiscal year ended December 31, 1993.
MANAGER
PRUDENTIAL MUTUAL FUND MANAGEMENT, INC. (PMF OR THE MANAGER), ONE SEAPORT
PLAZA, NEW YORK, NEW YORK 10292, IS THE MANAGER OF THE FUND AND IS COMPENSATED
FOR ITS SERVICES AT AN ANNUAL RATE OF .50 OF 1% OF THE FUND'S AVERAGE DAILY NET
ASSETS. PMF was incorporated in May 1987 under the laws of the State of
Delaware. For the fiscal year ended December 31, 1993, the Fund paid management
fees to PMF of .50% of the Fund's average net assets. See "Manager" in the
Statement of Additional Information.
As of March 31, 1994, PMF served as the manager to [37] open-end investment
companies, constituting all of the Prudential Mutual Funds, and as manager or
administrator to [29] closed-end investment companies. These companies have
aggregate assets of approximately [$51] billion.
UNDER THE MANAGEMENT AGREEMENT WITH THE FUND, PMF MANAGES THE INVESTMENT
OPERATIONS OF THE FUND AND ALSO ADMINISTERS THE FUND'S CORPORATE AFFAIRS. SEE
"MANAGER" IN THE STATEMENT OF ADDITIONAL INFORMATION.
UNDER A SUBADVISORY AGREEMENT BETWEEN PMF AND THE PRUDENTIAL INVESTMENT
CORPORATION (PIC OR THE SUBADVISER), PIC FURNISHES INVESTMENT ADVISORY SERVICES
IN CONNECTION WITH THE MANAGEMENT OF THE FUND AND IS REIMBURSED BY PMF FOR ITS
REASONABLE COSTS AND EXPENSES INCURRED IN PROVIDING SUCH SERVICES. Under the
Management Agreement, PMF continues to have responsibility for all investment
advisory services and supervises PIC's performance of such services.
The current portfolio manager of the Fund is David Graham, a Vice President of
Prudential Investment Avisors, a unit of PIC. Mr. Graham has responsibility for
the day-to-day management of the Fund's portfolio. Mr. Graham was previously
employed by Alliance Capital Management L.P. (February 1993-October 1993) as a
fixed-income portfolio manager in the mortgage-backed securities group, by
Equitable Capital Management Corporation (May 1989-February 1993), where he
served as a Vice President and was responsible for managing total return
accounts with mortgage securities, and, prior thereto, by Metropolitan Life
Insurance Company (June 1986-April 1989), where he served as a portfolio
manager. Mr. Graham joined PIC on November 15, 1993.
PMF and PIC are indirect, wholly-owned subsidiaries of The Prudential
Insurance Company of America (Prudential), a major diversified insurance and
financial services company.
DISTRIBUTOR
PRUDENTIAL MUTUAL FUND DISTRIBUTORS, INC. (PMFD), ONE SEAPORT PLAZA, NEW YORK,
NEW YORK 10292, IS A CORPORATION ORGANIZED UNDER THE LAWS OF THE STATE OF
DELAWARE AND SERVES AS THE DISTRIBUTOR OF THE CLASS A SHARES OF THE FUND. IT IS
A WHOLLY-OWNED SUBSIDIARY OF PMF.
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<PAGE>
PRUDENTIAL SECURITIES INCORPORATED (PRUDENTIAL SECURITIES OR PSI), ONE SEAPORT
PLAZA, NEW YORK, NEW YORK 10292, IS A CORPORATION ORGANIZED UNDER THE LAWS OF
THE STATE OF DELAWARE AND SERVES AS THE DISTRIBUTOR OF THE CLASS B AND CLASS C
SHARES OF THE FUND. IT IS AN INDIRECT, WHOLLY-OWNED SUBSIDIARY OF PRUDENTIAL.
UNDER SEPARATE DISTRIBUTION AND SERVICE PLANS (THE CLASS A PLAN, THE CLASS B
PLAN AND THE CLASS C PLAN, COLLECTIVELY, THE PLANS) ADOPTED BY THE FUND UNDER
RULE 12b-1 under the Investment Company Act and separate distribution agreements
(the Distribution Agreements), PMFD and Prudential Securities (collectively, the
Distributor) incur the expenses of distributing the Fund's Class A, Class B and
Class C shares. These expenses include commissions and account servicing fees
paid to, or on account of, financial advisers of Prudential Securities and Pruco
Securities Corporation (Prusec), an affiliated broker-dealer, commissions and
account servicing fees paid to, or on account of, other broker-dealers or
financial institutions (other than national banks) which have entered into
agreements with the Distributor, advertising expenses, the cost of printing and
mailing prospectuses to potential investors and indirect and overhead costs of
Prudential Securities and Prusec associated with the sale of Fund shares,
including lease, utility, communications and sales promotion expenses. The State
of Texas requires that shares of the Fund may be sold in that state only by
dealers or other financial institutions which are registered there as broker-
dealers.
Under the Plans, the Fund is obligated to pay distribution and/or service fees
to the Distributor as compensation for its distribution and service activities,
not as reimbursement for specific expenses incurred. If the Distributor's
expenses exceed its distribution and service fees, the Fund will not be
obligated to pay any additional expenses. If the Distributor's expenses are less
than such distribution and service fees, it will retain its full fees and
realize a profit.
UNDER THE CLASS A PLAN, THE FUND MAY PAY PMFD FOR ITS DISTRIBUTION-RELATED
EXPENSES WITH RESPECT TO CLASS A SHARES AT AN ANNUAL RATE OF UP TO .30 OF 1% OF
THE AVERAGE DAILY NET ASSETS OF THE CLASS A SHARES. The Class A Plan provides
that (i) up to .25 of 1% of the average daily net assets of the Class A shares
may be used to pay for personal service and/ or the maintenance of shareholder
accounts (service fee) and (ii) total distribution fees (including the service
fee of up to .25 of 1%) may not exceed .30 of 1% of the average daily net assets
of the Class A shares. It is expected that in the case of Class A shares,
proceeds from the distribution fee will be used primarily to pay account
servicing fees to financial advisers. PMFD has agreed to limit its
distribution-related fees payable under the Class A Plan to .25 of 1% of the
average daily net assets of the Class A shares for the fiscal year ending
December 31, 1994.
For the fiscal year ended December 31, 1993, PMFD received payments of $15,299
under the Class A Plan as reimbursement of expenses related to the distribution
of Class A shares. This amount was primarily expended for payment of account
servicing fees to financial advisers and other persons who sell Class A shares.
For the fiscal year ended December 31, 1993, PMFD also received approximately
$131,000 in initial sales charges.
UNDER THE CLASS B AND CLASS C PLANS, THE FUND MAY PAY PRUDENTIAL SECURITIES
FOR ITS DISTRIBUTION-RELATED EXPENSES WITH RESPECT TO CLASS B AND CLASS C SHARES
AT AN ANNUAL RATE OF UP TO .75 OF 1% AND UP TO 1% OF THE AVERAGE DAILY NET
ASSETS OF THE CLASS B AND CLASS C SHARES, RESPECTIVELY. The Class B Plan
provides for the payment to Prudential Securities of (i) an asset-based sales
charge of .75 of 1% of the average daily net assets of the Class B shares, and
(ii) a service fee of up to .25 of 1% of the average daily net assets of the
Class B shares; provided that the total distribution-related fee does not exceed
.75 of 1%. The Class C Plan provides for the payment to Prudential Securities of
(i) an asset-based sales charge of up to 1% of the average daily net assets of
the Class C shares, and (ii) a service fee of up to .25 of 1% of the average
daily net assets of the Class C shares. The service fee is used to pay for
personal service and/or the maintenance of shareholder accounts. Prudential
Securities has agreed to limit its distribution-related fees payable under the
Class C Plan to .75 of 1% of the average daily net assets of the Class C shares
for the fiscal year ending December 31, 1994. Prudential Securities also
receives contingent deferred sales charges from certain redeeming shareholders.
See "Shareholder Guide--How to Sell Your Shares-- Contingent Deferred Sales
Charges."
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<PAGE>
For the fiscal year ended December 31, 1993, Prudential Securities incurred
distribution expenses of approximately $2,744,800 under the Class B Plan and
received $2,495,486 from the Fund under the Class B Plan. In addition,
Prudential Securities received approximately $504,000 in contingent deferred
sales charges from redemptions of Class B shares during this period. No Class C
shares were outstanding during the fiscal year ending December 31, 1993.
For the fiscal year ended December 31, 1993, the Fund paid distribution
expenses of .15% and .75% of the average daily net assets of the Class A and
Class B shares, respectively. The Fund records all payments made under the Plans
as expenses in the calculation of net investment income. No Class C shares were
outstanding during the fiscal year ended December 31, 1993.
Distribution expenses attributable to the sale of shares of the Fund will be
allocated to each class based upon the ratio of sales of each class to the sales
of all shares of the Fund other than expenses allocable to a particular class.
The distribution fee and sales charge of one class will not be used to subsidize
the sale of another class.
Each Plan provides that it shall continue in effect from year to year provided
that a majority of the Board of Directors of the Fund, including a majority of
the Directors who are not "interested persons" of the Fund (as defined in the
Investment Company Act) and who have no direct or indirect financial interest in
the operation of the Plan or any agreement related to the Plan (the Rule 12b-1
Directors), vote annually to continue the Plan. Each Plan may be terminated at
any time by vote of a majority of the Rule 12b-1 Directors or of a majority of
the outstanding shares of the applicable class of the Fund. The Fund will not be
obligated to pay expenses incurred under any plan if it is terminated or not
continued.
In addition to distribution and service fees paid by the Fund under the Class
A, Class B and Class C Plans, the Manager (or one of its affiliates) may make
payments to dealers and other persons which distribute shares of the Fund. Such
payments may be calculated by the reference to the net asset value of shares
sold by such persons or otherwise.
The Distributor is subject to the rules of the National Association of
Securities Dealers, Inc. governing maximum sales charges. See "Distributor" in
the Statement of Additional Information.
PORTFOLIO TRANSACTIONS
Prudential Securities may also act as a broker or futures commission merchant
for the Fund, provided that the commissions, fees or other remuneration it
receives are fair and reasonable. See "Portfolio Transactions and Brokerage" in
the Statement of Additional Information.
CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, serves as Custodian for the Fund's portfolio securities and
cash and, in that capacity, maintains certain financial and accounting books and
records pursuant to an agreement with the Fund. Its mailing address is P.O. Box
1713, Boston, Massachusetts 02105.
Prudential Mutual Fund Services, Inc. (PMFS), Raritan Plaza One, Edison, New
Jersey 08837, serves as Transfer Agent and Dividend Disbursing Agent and in
those capacities maintains certain books and records for the Fund. PMFS is a
wholly-owned subsidiary of PMF. Its mailing address is P.O. Box 15005, New
Brunswick, New Jersey 08906-5005.
HOW THE FUND VALUES ITS SHARES
THE FUND'S NET ASSET VALUE PER SHARE OR NAV IS DETERMINED BY SUBTRACTING ITS
LIABILITIES FROM THE VALUE OF ITS ASSETS AND DIVIDING THE REMAINDER BY THE
NUMBER OF OUTSTANDING SHARES. NAV IS CALCULATED SEPARATELY FOR EACH CLASS. THE
BOARD OF DIRECTORS HAS FIXED THE SPECIFIC TIME OF DAY FOR THE COMPUTATION OF THE
FUND'S NAV TO BE AS OF 4:15 P.M. NEW YORK TIME.
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<PAGE>
Portfolio securities are valued based on market quotations or, if not readily
available, at fair value as determined in good faith under procedures
established by the Fund's Board of Directors. See "Net Asset Value" in the
Statement of Additional Information.
The Fund will compute its NAV once daily on days that the New York Stock
Exchange is open for trading except on days on which no orders to purchase, sell
or redeem shares have been received by the Fund or days on which changes in the
value of the Fund's portfolio securities do not materially affect the NAV. The
New York Stock Exchange is closed on the following holidays: New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
Although the legal rights of each class of shares are substantially identical,
the different expenses borne by each class will result in different dividends.
As long as the Fund declares dividends daily, the NAV of the Class A, Class B
and Class C shares will generally be the same. It is expected, however, that the
dividends will differ by approximately the amount of the distribution-related
expense accrual differential among the classes.
HOW THE FUND CALCULATES PERFORMANCE
FROM TIME TO TIME THE FUND MAY ADVERTISE ITS "YIELD" AND "TOTAL RETURN"
(INCLUDING "AVERAGE ANNUAL" TOTAL RETURN AND "AGGREGATE" TOTAL RETURN) IN
ADVERTISEMENTS AND SALES LITERATURE. YIELD AND TOTAL RETURN ARE CALCULATED
SEPARATELY FOR CLASS A, CLASS B AND CLASS C SHARES. THESE FIGURES ARE BASED ON
HISTORICAL EARNINGS AND ARE NOT INTENDED TO INDICATE FUTURE PERFORMANCE. The
"yield" refers to the income generated by an investment in the Fund over a
one-month or 30-day period. This income is then "annualized;" that is, the
amount of income generated by the investment during that 30-day period is
assumed to be generated each 30-day period for twelve periods and is shown as a
percentage of the investment. The income earned on the investment is also
assumed to be reinvested at the end of the sixth 30-day period. The "total
return" shows how much an investment in the Fund would have increased
(decreased) over a specified period of time (I.E., one, five or ten years or
since inception of the Fund) assuming that all distributions and dividends by
the Fund were reinvested on the reinvestment dates during the period and less
all recurring fees. The "aggregate" total return reflects actual performance
over a stated period of time. "Average annual" total return is a hypothetical
rate of return that, if achieved annually, would have produced the same
aggregate total return if performance had been constant over the entire period.
"Average annual" total return smooths out variations in performance and takes
into account any applicable initial or contingent deferred sales charges.
Neither "average annnual" total return nor "aggregate" total return takes into
account any federal or state income taxes which may be payable upon redemption.
The Fund also may include comparative peformance information in advertising or
marketing the Fund's shares. Such performance information may include data from
Lipper Analytical Services, Inc., other industry publications, business
periodicals and market indices. See "Performance Information" in the Statement
of Additional Information. The Fund will include performance data for each class
of shares of the Fund in any advertisement or information including performance
data of the Fund. Further performance information is contained in the Fund's
annual and semi-annual reports to shareholders, which may be obtained without
charge. See "Shareholder Guide--Shareholder Services--Reports to Shareholders."
TAXES, DIVIDENDS AND DISTRIBUTIONS
TAXATION OF THE FUND
THE FUND HAS ELECTED TO QUALIFY AND INTENDS TO REMAIN QUALIFIED AS A REGULATED
INVESTMENT COMPANY UNDER THE INTERNAL REVENUE CODE OF 1986, AS AMENDED.
ACCORDINGLY, THE FUND WILL NOT BE SUBJECT TO FEDERAL INCOME TAXES ON ITS NET
INVESTMENT INCOME AND CAPITAL GAINS, IF ANY, THAT IT DISTRIBUTES TO ITS
SHAREHOLDERS. See "Taxes" in the Statement of Additional Information.
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<PAGE>
TAXATION OF SHAREHOLDERS
All dividends out of net investment income, together with distributions of net
short-term capital gains in excess of net long-term capital losses, will be
taxable as ordinary income to the shareholder whether or not reinvested. Any net
long-term capital gains (I.E., the excess of net long-term capital gains over
net short-term capital losses) distributed to shareholders will be taxable as
such to the shareholders, whether or not reinvested and regardless of the length
of time a shareholder has owned his or her shares. The maximum long-term capital
gains rate for individuals is 28%. The maximum long-term capital gains rate for
corporate shareholders is currently the same as the maximum tax rate for
ordinary income.
Any gain or loss realized upon a sale or redemption of Fund shares by a
shareholder who is not a dealer in securities will be treated as long-term
capital gain or loss if the shares have been held more than one year, and
otherwise as short-term capital gain or loss. Any such loss, however, on shares
that have been held for six months or less will be treated as long-term capital
loss to the extent of any capital gain distributions received by the
shareholders.
The Fund has obtained an opinion of counsel to the effect that the conversion
of Class B shares into Class A shares does not constitute a taxable event for
U.S. income tax purposes. However, such opinion is not binding on the Internal
Revenue Service.
Shareholders are advised to consult their own tax advisers regarding specific
questions as to federal, state or local taxes. See "Taxes" in the Statement of
Additional Information.
WITHHOLDING TAXES
Under U.S. Treasury Regulations, the Fund generally is required to withhold
and remit to the U.S. Treasury 31% of dividends, capital gain distributions and
redemption proceeds on the accounts of those shareholders who fail to furnish
their tax identification numbers on IRS Form W-9 (or IRS Form W-8 in the case of
certain foreign shareholders) or who are otherwise subject to backup
withholding. Dividends of net investment income and net short-term capital gains
paid to a foreign shareholder will generally be subject to U.S. withholding tax
at the rate of 30% (or lower treaty rate).
DIVIDEND AND DISTRIBUTIONS
THE FUND INTENDS TO DECLARE DAILY AND PAY MONTHLY INCOME DIVIDENDS BASED ON
ACTUAL NET INVESTMENT INCOME, IF ANY, DETERMINED IN ACCORDANCE WITH GENERALLY
ACCEPTED ACCOUNTING PRINCIPLES; HOWEVER, A PORTION OF SUCH DIVIDENDS MAY ALSO
INCLUDE PROJECTED NET INVESTMENT INCOME. The Fund expects to make distributions
of net capital gains, if any, at least annually. Dividends paid by the Fund with
respect to each class of shares, to the extent any dividends are paid, will be
calculated in the same manner, at the same time, on the same day and will be in
the same amount except that each class will bear its own distribution expenses,
generally resulting in lower dividends for Class B and Class C shares.
Distributions of net capital gains, if any, will be paid in the same amount for
each class of shares. See "How the Fund Values its Shares."
DIVIDENDS AND DISTRIBUTIONS WILL BE PAID IN ADDITIONAL FUND SHARES BASED ON
THE NAV OF EACH CLASS ON THE RECORD DATE OR SUCH OTHER DATE AS THE BOARD OF
DIRECTORS MAY DETERMINE, UNLESS THE SHAREHOLDER ELECTS IN WRITING NOT LESS THAN
FIVE BUSINESS DAYS PRIOR TO THE RECORD DATE TO RECEIVE SUCH DIVIDENDS AND
DISTRIBUTIONS IN CASH. Such election should be submitted to Prudential Mutual
Fund Services, Inc., Attention: Account Maintenance, P.O. Box 15015, New
Brunswick, New Jersey 08906-5015. If you hold shares through Prudential
Securities, you should contact your financial adviser to elect to receive
dividends and distributions in cash. The Fund will notify each shareholder after
the close of the Fund's taxable year of both the dollar amount and the taxable
status of that year's dividends and distributions on a per share basis.
As of December 31, 1993, the Fund had a capital loss carryforward for federal
income tax purposes of $11,324,000. Accordingly, no capital gains distribution
is expected to be paid to shareholders until net gains have been realized in
excess of such carryforward amount.
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<PAGE>
To the extent that, in a given year, distributions to shareholders exceed
recognized net investment income and recognized short-term and long-term capital
gains for the year, shareholders will receive a return of capital in respect of
such year and, in an annual statement, will be notified of the amount of any
return of capital for such year.
When the Fund goes "ex-dividend," the NAV of each class is reduced by the
amount of the dividend or distribution allocable to each class. If you buy
shares just prior to the ex-dividend date (which generally occurs four business
days prior to the record date), the price you pay will include the dividend or
distribution and a portion of your investment will be returned to you as a
taxable dividend or distribution. Accordingly, prior to purchasing shares of the
Fund, an investor should carefully consider the impact of dividends and
distributions which are expected to be or have been announced.
GENERAL INFORMATION
DESCRIPTION OF COMMON STOCK
THE FUND WAS INCORPORATED IN MARYLAND ON JANUARY 4, 1982. THE FUND IS
AUTHORIZED TO ISSUE 500 MILLION SHARES OF COMMON STOCK, $.01 PAR VALUE PER
SHARE, DIVIDED INTO THREE CLASSES, DESIGNATED CLASS A, CLASS B AND CLASS C
COMMON STOCK, EACH OF WHICH CONSISTS OF 166 2/3 MILLION AUTHORIZED SHARES. Each
class of common stock represents an interest in the same assets of the Fund and
is identical in all respects except that (i) each class bears different
distribution expenses, (ii) each class has exclusive voting rights with respect
to its distribution and service plan (except that the Fund has agreed with the
SEC in connection with the offering of a conversion feature on Class B shares to
submit any amendment of the Class A Plan to both Class A and Class B
shareholders), (iii) each class has a different exchange privilege and (iv) only
Class B shares have a conversion feature. See "How the Fund is
Managed--Distributor." The Fund has received an order from the SEC permitting
the issuance and sale of multiple classes of common stock. Currently, the Fund
is offering three classes, designated Class A, Class B and Class C shares. In
accordance with the Fund's Articles of Incorporation, the Board of Directors may
authorize the creation of additional series of common stock and classes within
such series, with such preferences, privileges, limitations and voting and
dividend rights as the Board may determine.
The Board of Directors may increase or decrease the number of authorized
shares without approval by the shareholders. Shares of the Fund, when issued,
are fully paid, nonassessable, fully transferable and redeemable at the option
of the holder. Shares are also redeemable at the option of the Fund under
certain circumstances as described under "Shareholder Guide--How to Sell Your
Shares." Each share of each class of common stock is equal as to earnings,
assets and voting privileges, except as noted above, and each class bears the
expenses related to the distribution of its shares. Except for the conversion
feature applicable to the Class B shares, there are no conversion, preemptive or
other subscription rights. In the event of liquidation, each share of common
stock of the Fund is entitled to its portion of all of the Fund's assets after
all debt and expenses of the Fund have been paid. Since Class B and Class C
shares generally bear higher distribution expenses than Class A shares, the
liquidation proceeds to shareholders of those classes are likely to be lower
than to Class A shareholders. The Fund's shares do not have cumulative voting
rights for the election of Directors.
THE FUND DOES NOT INTEND TO HOLD ANNUAL MEETINGS OF SHAREHOLDERS UNLESS
OTHERWISE REQUIRED BY LAW. THE FUND WILL NOT BE REQUIRED TO HOLD MEETINGS OF
SHAREHOLDERS UNLESS, FOR EXAMPLE, THE ELECTION OF DIRECTORS IS REQUIRED TO BE
ACTED ON BY SHAREHOLDERS UNDER THE INVESTMENT COMPANY ACT. SHAREHOLDERS HAVE
CERTAIN RIGHTS, INCLUDING THE RIGHT TO CALL A MEETING UPON A VOTE OF 10% OF THE
FUND'S OUTSTANDING SHARES FOR THE PURPOSE OF VOTING ON THE REMOVAL OF ONE OR
MORE DIRECTORS OR TO TRANSACT ANY OTHER BUSINESS.
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<PAGE>
ADDITIONAL INFORMATION
This Prospectus, including the Statement of Additional Information which has
been incorporated by reference herein, does not contain all the information set
forth in the Registration Statement filed by the Fund with the SEC under the
Securities Act of 1933. Copies of the Registration Statement may be obtained at
a reasonable charge from the SEC or may be examined, without charge, at the
office of the SEC in Washington, D.C.
SHAREHOLDER GUIDE
HOW TO BUY SHARES OF THE FUND
YOU MAY PURCHASE SHARES OF THE FUND THROUGH PRUDENTIAL SECURITIES, PRUSEC OR
DIRECTLY FROM THE FUND THROUGH ITS TRANSFER AGENT, PRUDENTIAL MUTUAL FUND
SERVICES, INC. (PMFS OR THE TRANSFER AGENT). The minimum initial investment for
Class A and Class B shares is $1,000 per class and $5,000 for Class C shares.
The minimum subsequent investment is $100 for all classes. All minimum
investment requirements are waived for certain retirement and employee savings
plans or custodial accounts for the benefit of minors. For purchases made
through the Automatic Savings Accumulation Plan, the minimum initial and
subsequent investment required is $50. See "Shareholder Services" below.
THE PURCHASE PRICE IS THE NAV PER SHARE NEXT DETERMINED FOLLOWING RECEIPT OF
AN ORDER BY THE TRANSFER AGENT OR PRUDENTIAL SECURITIES PLUS A SALES CHARGE
WHICH, AT YOUR OPTION, MAY BE IMPOSED EITHER (I) AT THE TIME OF PURCHASE (CLASS
A SHARES) OR (II) ON A DEFERRED BASIS (CLASS B OR CLASS C SHARES). SEE
"ALTERNATIVE PURCHASE PLAN" BELOW. SEE ALSO "HOW THE FUND VALUES ITS SHARES."
Application Forms can be obtained from PMFS, Prudential Securities or Prusec.
If a stock certificate is desired, it must be requested in writing for each
transaction. Certificates are issued only for full shares. Shareholders who hold
their shares through Prudential Securities will not receive stock certificates.
The Fund reserves the right to reject any purchase order (including an
exchange) or to suspend or modify the continuous offering of its shares. See
"How to Sell Your Shares" below.
Your dealer is responsible for forwarding payment promptly to the Fund. The
Distributor reserves the right to cancel any purchase order for which payment
has not been received by the fifth business day following the investment.
Transactions in Fund shares may be subject to postage and handling charges
imposed by your dealer.
PURCHASE BY WIRE. For an initial purchase of shares of the Fund by wire, you
must first telephone PMFS at (800) 225-1852 (toll-free) to receive an account
number. The following information will be requested: your name, address, tax
identification number, class election, dividend distribution election, amount
being wired and wiring bank. Instructions should then be given by you to your
bank to transfer funds by wire to State Street Bank and Trust Company, Boston,
Massachusetts, Custody and Shareholder Services Division, Attention: Prudential
GNMA Fund, Inc., specifying on the wire the account number assigned by PMFS and
your name and identifying the sales charge alternative (Class A, Class B or
Class C shares).
If you arrange for receipt by State Street of Federal Funds prior to 4:15
P.M., New York time, on a business day, you may purchase 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 GNMA Fund, Inc.,
Class A, Class B or Class C shares and your name and individual account number.
It is not necessary to call PMFS to make subsequent purchase orders utilizing
Federal Funds. The minimum amount which may be invested by wire is $1,000.
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<PAGE>
ALTERNATIVE PURCHASE PLAN
THE FUND OFFERS THREE CLASSES OF SHARES (CLASS A, CLASS B AND CLASS C SHARES)
WHICH ALLOWS YOU TO CHOOSE THE MOST BENEFICIAL SALES CHARGE STRUCTURE FOR YOUR
INDIVIDUAL CIRCUMSTANCES GIVEN THE AMOUNT OF THE PURCHASE, THE LENGTH OF TIME
YOU EXPECT TO HOLD THE SHARES AND OTHER RELEVANT CIRCUMSTANCES (the Alternative
Purchase Plan).
<TABLE>
<CAPTION>
ANNUAL 12B-1 FEES
(AS A % OF AVERAGE
DAILY
SALES CHARGE NET ASSETS) OTHER INFORMATION
-------------------------------------- ----------------------- --------------------------------------
<S> <C> <C> <C>
CLASS A Maximum initial sales charge of 4% of .30 of 1% (Currently Initial sales charge waived or reduced
the public offering price being charged at a rate for certain purchases
of .15 of 1%)
CLASS B Maximum contingent deferred sales 0.75 of 1% Shares convert to Class A shares
charge or CDSC of 5% of the lesser of approximately seven years after
the amount invested or the redemption purchase
proceeds; declines to zero after six
years
CLASS C Maximum CDSC of 1% of the lesser of 1% (Currently being Shares do not convert to another class
the amount invested or the redemption charged at a rate of
proceeds on redemptions made within .75 of 1%)
one year of purchase
</TABLE>
The three classes of shares represent an interest in the same portfolio of
investments of the Fund and have the same rights, except that (i) each class
bears the separate expenses of its Rule 12b-1 distribution and service plan,
(ii) each class has exclusive voting rights with respect to its plan (except as
noted under the heading "General Information--Description of Common Stock"), and
(iii) only Class B shares have a conversion feature. The three classes also have
separate exchange privileges. See "How to Exchange Your Shares" below. The
income attributable to each class and the dividends payable on the shares of
each class will be reduced by the amount of the distribution fee of each class.
Class B and Class C shares bear the expenses of a higher distribution fee which
will generally cause them to have higher expense ratios and to pay lower
dividends than the Class A shares.
Financial advisers and other sales agents who sell shares of the Fund will
receive different compensation for selling Class A, Class B and Class C shares
and will generally receive more compensation initially for selling Class A and
Class B shares than for selling Class C shares.
IN SELECTING A PURCHASE ALTERNATIVE, YOU SHOULD CONSIDER, AMONG OTHER THINGS,
(1) the length of time you expect to hold your investment, (2) the amount of any
applicable sales charge (whether imposed at the time of purchase or redemption)
and distribution-related fees, as noted above, (3) whether you qualify for any
reduction or waiver of any applicable sales charge, (4) the various exchange
privileges among the different classes of shares (see "How to Exchange Your
Shares" below) and (5) the fact that Class B shares automatically convert to
Class A shares approximately seven years after purchase (see "Conversion
Feature--Class B Shares" below).
The following is provided to assist you in determining which method of
purchase best suits your individual circumstances and is based on current fees
and expenses being charged to the Fund:
If you intend to hold your investment in the Fund for less than 7 years and do
not qualify for a reduced sales charge on Class A shares, since Class A shares
are subject to an initial sales charge of 4% and Class B shares are subject to a
CDSC of 5% which declines to zero over a 6 year period, you should consider
purchasing Class C shares over either Class A or Class B shares.
If you intend to hold your investment for more than 6 years, you should
consider purchasing Class A shares over either Class B or Class C shares
regardless of whether or not you qualify for a reduced sales charge on Class A
shares.
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If you qualify for a reduced sales charge on Class A shares, it may be more
advantageous for you to purchase Class A shares over either Class B or Class C
shares regardless of how long you intend to hold your investment. However,
unlike Class B and Class C shares, you would not have your entire purchase price
invested initially because the sales charge on Class A shares is deducted at the
time of purchase.
[If you do not qualify for a reduced sales charge on Class A shares and you
purchase Class B or Class C shares, you would have to hold your investment for
more than [6 years in the case of Class B shares and Class C shares] for the
higher cumulative annual distribution-related fee on those shares to exceed the
initial sales charge plus cumulative annual distribution-related fee on Class A
shares. This does not take into account the time value of money, which further
reduces the impact of the higher Class B or Class C distribution-related fee on
the investment, fluctuations in net asset value, the effect of the return on the
investment over this period of time or redemptions during which the CDSC is
applicable.]
ALL PURCHASES OF $1 MILLION OR MORE EITHER AS PART OF A SINGLE INVESTMENT OR[,
EXCEPT IN THE CASE OF CERTAIN RETIREMENT PLANS,] UNDER RIGHTS OF ACCUMULATION OR
LETTERS OF INTENT, MUST BE FOR CLASS A SHARES. SEE "REDUCTION ON WAIVER OF
INITIAL SALES CHARGES" BELOW.
CLASS A SHARES
The offering price of Class A shares for investors choosing the initial sales
charge alternative is the next determined NAV plus a sales charge (expressed as
a percentage of the offering price and of the amount invested) as shown in the
following table:
<TABLE>
<CAPTION>
SALES CHARGE AS SALES CHARGE AS DEALER CONCESSION
PERCENTAGE OF PERCENTAGE OF AS PERCENTAGE OF
AMOUNT OF PURCHASE OFFERING PRICE AMOUNT INVESTED OFFERING PRICE
- ------------------------- ----------------- ---------------- -------------------
<S> <C> <C> <C>
Less than $50,000 4.00% 4.17% 3.75%
$50,000 to $99,999 3.50% 3.63% 3.25%
$100,000 to $249,999 2.75% 2.83% 2.50%
$250,000 to $499,999 2.00% 2.04% 1.90%
$500,000 to $999,999 1.50% 1.52% 1.40%
$1,000,000 and above 0.00% None None
</TABLE>
Selling dealers may be deemed to be underwriters, as that term is defined in
the Securities Act.
REDUCTION AND WAIVER OF INITIAL SALES CHARGES. Reduced sales charges are
available through Rights of Accumulation and Letters of Intent. Shares of the
Fund and shares of other Prudential Mutual Funds (excluding money market funds
other than those acquired pursuant to the exchange privilege) may be aggregated
to determine the applicable reduction. See "Reduction and Waiver of Initial
Sales Charges--Class A shares" in the Statement of Additional Information.
Class A shares may be purchased at NAV, without payment of an initial sales
charge, by pension, profit-sharing or other employee benefit plans qualified
under Section 401 of the Internal Revenue Code and deferred compensation and
annuity plans under Sections 457 and 403(b)(7) of the Internal Revenue Code
(Benefit Plans), provided that the plan has existing assets of at least $1
million invested in shares of Prudential Mutual Funds (excluding money market
funds other than those acquired pursuant to the exchange privilege) or 1,000
eligible employees or members. In the case of Benefit Plans whose accounts are
held directly with the Transfer Agent and for which the Transfer Agent does
individual account record-keeping (Direct Account Benefit Plans) and Benefit
Plans sponsored by PSI or its subsidiaries (PSI or Subsidiary Prototype Benefit
Plans), Class A shares may be purchased at NAV by participants who are repaying
loans made from such plans to the participant. Additional information concerning
the reduction and waiver of initial sales charges is set forth in the Statement
of Additional Information.
In addition, Class A shares may be purchased at NAV, through Prudential
Securities or the Transfer Agent, by the following persons: (a) Directors and
officers of the Fund and other Prudential Mutual Funds, (b) employees of
Prudential Securities and
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<PAGE>
PMF and their subsidiaries and members of the families of such persons who
maintain an "employee related" account at Prudential Securities or the Transfer
Agent, (c) employees and special agents of Prudential and its subsidiaries and
all persons who have retired directly from active service with Prudential or one
of its subsidiaries, (d) registered representatives and employees of dealers who
have entered into a selected dealer agreement with Prudential Securities
provided that purchases at NAV are permitted by such person's employer and (e)
investors who have a business relationship with a financial adviser who joined
Prudential Securities from another investment firm, provided that (i) the
purchase is made within 90 days of the commencment of the financial adviser's
employment at Prudential Securities, (ii) the purchase is made with proceeds of
a redemption of shares of any open-end, non-money market fund sponsored by the
financial adviser's previous employer (other than a fund which imposes a
distribution or service fee of .25 of 1% or less) on which no deferred sales
load, fee or other charge was imposed on redemption and (iii) the financial
adviser served as the client's broker on the previous purchases.
You must notify the Transfer Agent either directly or through Prudential
Securities or Prusec that you are entitled to the reduction or waiver of the
sales charge. The reduction or waiver will be granted subject to confirmation of
your entitlement. No initial sales charges are imposed upon Class A shares
purchased upon the reinvestment of dividends and distributions. See "Purchase
and Redemption of Fund Shares--Reduction and Waiver of Initial Sales
Charges--Class A Shares" in the Statement of Additional Information.
CLASS B AND CLASS C SHARES
The offering price of Class B and Class C shares for investors choosing one of
the deferred sales charge alternatives is the NAV per share next determined
following receipt of an order by the Transfer Agent or Prudential Securities.
Although there is no sales charge imposed at the time of purchase, redemptions
of Class B and Class C shares may be subject to a CDSC. See "How to Sell Your
Shares--Contingent Deferred Sales Charges" below.
HOW TO SELL YOUR SHARES
YOU CAN REDEEM YOUR SHARES AT ANY TIME FOR CASH AT THE NAV NEXT DETERMINED
AFTER THE REDEMPTION REQUEST IS RECEIVED IN PROPER FORM BY THE TRANSFER AGENT OR
PRUDENTIAL SECURITIES. SEE "HOW THE FUND VALUES ITS SHARES." In certain cases,
however, redemption proceeds will be reduced by the amount of any applicable
contingent deferred sales charge, as described below. See "Contingent Deferred
Sales Charges" below.
IF YOU HOLD SHARES OF THE FUND THROUGH PRUDENTIAL SECURITIES, YOU MUST REDEEM
SHARES BY CONTACTING YOUR PRUDENTIAL SECURITIES FINANCIAL ADVISER. IF YOU HOLD
SHARES IN NON-CERTIFICATE FORM, A WRITTEN REQUEST FOR REDEMPTION SIGNED BY YOU
EXACTLY AS THE ACCOUNT IS REGISTERED IS REQUIRED. IF YOU HOLD CERTIFICATES, THE
CERTIFICATES, SIGNED IN THE NAME(S) SHOWN ON THE FACE OF THE CERTIFICATES, MUST
BE RECEIVED BY THE TRANSFER AGENT IN ORDER FOR THE REDEMPTION REQUEST TO BE
PROCESSED. IF REDEMPTION IS REQUESTED BY A CORPORATION, PARTNERSHIP, TRUST OR
FIDUCIARY, WRITTEN EVIDENCE OF AUTHORITY ACCEPTABLE TO THE TRANSFER AGENT MUST
BE SUBMITTED BEFORE SUCH REQUEST WILL BE ACCEPTED. All correspondence and
documents concerning redemptions should be sent to the Fund in care of its
Transfer Agent, Prudential Mutual Fund Services, Inc., Attention: Redemption
Services, P.O. Box 15010, New Brunswick, New Jersey 08906-5010.
If the proceeds of the redemption (a) exceed $50,000, (b) are to be paid to a
person other than the record owner, (c) are to be sent to an address other than
the address on the Transfer Agent's records, or (d) are to be paid to a
corporation, partnership, trust or fiduciary, the signature(s) on the redemption
request and on the certificates, if any, must be guaranteed by an "eligible
guarantor institution." An "eligible guarantor institution" includes any bank,
broker, dealer or credit union. The Transfer Agent reserves the right to request
additional information from, and make reasonable inquiries of, any eligible
guarantor institution. For clients of Prusec, a signature guarantee may be
obtained from the agency or office manager of most Prudential Insurance and
Financial Services or Prudential Preferred Financial Services offices.
PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE MADE BY CHECK WITHIN SEVEN
DAYS AFTER RECEIPT BY THE TRANSFER AGENT OF THE CERTIFICATE AND/OR WRITTEN
REQUEST EXCEPT AS INDICATED BELOW. Such payment may be postponed or
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<PAGE>
the right of redemption suspended at times (a) when the New York Stock Exchange
is closed for other than customary weekends and holidays, (b) when trading on
such Exchange is restricted, (c) when an emergency exists as a result of which
disposal by the Fund of securities owned by it is not reasonably practicable or
it is not reasonably practicable for the Fund fairly to determine the value of
its net assets, or (d) during any other period when the SEC, by order, so
permits; provided that applicable rules and regulations of the SEC shall govern
as to whether the conditions prescribed in (b), (c) or (d) exist.
PAYMENT FOR REDEMPTION OF RECENTLY PURCHASED SHARES WILL BE DELAYED UNTIL THE
FUND OR ITS TRANSFER AGENT HAS BEEN ADVISED THAT THE PURCHASE CHECK HAS BEEN
HONORED, UP TO 10 CALENDAR DAYS FROM THE TIME OF RECEIPT OF THE PURCHASE CHECK
BY THE TRANSFER AGENT. SUCH DELAY MAY BE AVOIDED BY PURCHASING SHARES BY WIRE OR
BY CERTIFIED OR OFFICIAL BANK CHECK.
REDEMPTION IN KIND. If the Board of Directors determines that it would be
detrimental to the best interests of the remaining shareholders of the Fund to
make payment wholly or partly in cash, the Fund may pay the redemption price in
whole or in part by a distribution in kind of securities from the investment
portfolio of the Fund, in lieu of cash, in conformity with applicable rules of
the SEC. Securities will be readily marketable and will be valued in the same
manner as in a regular redemption. See "How The Fund Values its Shares." If your
shares are redeemed in kind, you will incur transaction costs in converting the
assets into cash. The Fund, however, has elected to be governed by Rule 18f-1
under the Investment Company Act, under which the Fund is obligated to redeem
shares solely in cash up to the lesser of $250,000 or 1% of the net asset value
of the Fund during any 90-day period for any one shareholder.
INVOLUNTARY REDEMPTION. In order to reduce expenses of the Fund, the Board of
Directors may redeem all of the shares of any shareholder, other than a
shareholder which is an IRA or other tax-deferred retirement plan, whose account
has a net asset value of less than $500 due to a redemption. The Fund will give
such shareholders 60 days' prior written notice in which to purchase sufficient
additional shares to avoid such redemption. No contingent deferred sales charge
will be imposed on any involuntary redemption.
30-DAY REPURCHASE PRIVILEGE. If you redeem your shares and have not previously
exercised the repurchase privilege, you may reinvest any portion or all of the
proceeds of such redemption in shares of the Fund at the NAV next determined
after the order is received, which must be within 30 days after the date of the
redemption. No sales charge will apply to such repurchases. You will receive pro
rata credit for any contingent deferred sales charge paid in connection with the
redemption of your shares. You must notify the Fund's Transfer Agent, either
directly or through Prudential Securities or Prusec, at the time the repurchase
privilege is exercised that you are entitled to credit for the contingent
deferred sales charge previously paid. Exercise of the repurchase privilege
generally will not affect federal income tax treatment of any gain realized upon
redemption. If the redemption resulted in a loss, some or all of the loss,
depending on the amount reinvested, will generally not be allowed for federal
income tax purposes.
CONTINGENT DEFERRED SALES CHARGES
Redemptions of Class B shares will be subject to a contingent deferred sales
charge or CDSC declining from 5% to zero over a six-year period. Class C shares
redeemed within one year of purchase will be subject to a 1% CDSC. The CDSC will
be deducted from the redemption proceeds and reduce the amount paid to you. The
CDSC will be imposed on any redemption by you which reduces the current value of
your Class B or Class C shares to an amount which is lower than the amount of
all payments by you for shares during the preceding six years, in the case of
Class B shares, and one year, in the case of Class C shares. A CDSC will be
applied on the lesser of the original purchase price or the current value of the
shares being redeemed. Increases in the value of your shares or shares purchased
through reinvestment of dividends or distributions are not subject to a CDSC.
The amount of any CDSC will be paid to and retained by the Distributor. See "How
the Fund Is Managed--Distributor" and "Waiver of the Contingent Deferred Sales
Charges" below.
23
<PAGE>
The amount of the CDSC, if any, will vary depending on the number of years
from the time of payment for the purchase of shares until the time of redemption
of such shares. Solely for purposes of determining the number of years from the
time of any payment for the purchase of shares, all payments during a month will
be aggregated and deemed to have been made on the last day of the month.
The following table sets forth the rates of the CDSC applicable to redemptions
of Class B shares:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES
CHARGE AS A PERCENTAGE
YEAR SINCE PURCHASE OF DOLLARS INVESTED OR
PAYMENT MADE REDEMPTION PROCEEDS
------------------------------- -------------------------
<S> <C>
First.......................... 5.0%
Second......................... 4.0%
Third.......................... 3.0%
Fourth......................... 2.0%
Fifth.......................... 1.0%
Sixth.......................... 1.0%
Seventh........................ None
</TABLE>
In determining whether a CDSC is applicable to a redemption, the calculation
will be made in a manner that results in the lowest possible rate. It will be
assumed that the redemption is made first of amounts representing shares
acquired pursuant to the reinvestment of dividends and distributions; then of
amounts representing the increase in net asset value above the total amount of
payments for the purchase of Fund shares made during the preceding six years
(five years for Class B shares purchased prior to January 22, 1990); then of
amounts representing the cost of shares held beyond the applicable CDSC period;
then of amounts representing the cost of shares acquired prior to July 1, 1985;
and finally, of amounts representing the cost of shares held for the longest
period of time within the applicable CDSC period.
For example, assume you purchased 100 Class B shares at $10 per share for a
cost of $1,000. Subsequently, you acquired 5 additional Class B shares through
dividend reinvestment. During the second year after the purchase you decided to
redeem $500 of your investment. Assuming at the time of the redemption the net
asset value had appreciated to $12 per share, the value of your Class B shares
would be $1,260 (105 shares at $12 per share). The CDSC would not be applied to
the value of the reinvested dividend shares and the amount which represents
appreciation ($260). Therefore, $240 of the $500 redemption proceeds ($500 minus
$260) would be charged at a rate of 4% (the applicable rate in the second year
after purchase) for a total CDSC of $9.60.
For federal income tax purposes, the amount of the CDSC will reduce the gain
or increase the loss, as the case may be, on the amount recognized on the
redemption of shares.
WAIVER OF THE CONTINGENT DEFERRED SALES CHARGES--CLASS B SHARES. The CDSC will
be waived in the case of a redemption following the death or disability of a
shareholder or, in the case of a trust account, following the death or
disability of the grantor. The waiver is available for total or partial
redemptions of shares owned by a person, either individually or in joint tenancy
(with rights of survivorship), or a trust, at the time of death or initial
determination of disability, provided that the shares were purchased prior to
death or disability.
The CDSC will also be waived in the case of a total or partial redemption in
connection with certain distributions made without penalty under the Internal
Revenue Code from a tax-deferred retirement plan, an IRA or Section 403(b)(7)
custodial account. These distributions include a lump-sum or other distribution
after retirement, or for an IRA or Section 403(b)(7) custodial account, after
attaining age 59 1/2, a tax-free return of an excess contribution or plan
distributions following the death or disability of the shareholder (provided
that the shares were purchased prior to death or disability). The waiver does
not apply in the case of a tax-free rollover or transfer of assets, other than
one following a separation from service. In the case of Direct Account and PSI
or Subsidiary Prototype Benefit Plans, the CDSC will be waived on redemptions
which represent borrowings from such plans. Shares
24
<PAGE>
purchased with amounts used to repay a loan from such plans on which a CDSC was
not previously deducted will thereafter be subject to a CDSC without regard to
the time such amounts were previously invested. In the case of a 401(k) plan,
the CDSC will also be waived upon the redemption of shares purchased with
amounts used to repay loans made from the account to the participant and from
which a CDSC was previously deducted.
In addition, the CDSC will be waived on redemptions of shares held by
Directors of the Fund.
You must notify the Transfer Agent either directly or through Prudential
Securities or Prusec, at the time of redemption, that you are entitled to waiver
of the CDSC. The waiver will be granted subject to confirmation of your
entitlement.
A quantity discount may apply to redemptions of Class B shares purchased prior
to __________, 1994. See "Purchase and Redemption of Fund Shares--Quantity
Discount--Class B Shares--Purchased Prior to __________, 1994" in the Statement
of Additional Information.
CONVERSION FEATURE--CLASS B SHARES
Class B shares will automatically convert to Class A shares on a quarterly
basis approximately seven years after purchase. Conversions will occur during
the month following each calendar quarter and will be effected at relative net
asset value without the imposition of any additional sales charge. It is
currently anticipated that conversions will occur on the first Friday of the
month following each calendar quarter or, if not a business day then on the next
Friday of the month .
Since the Fund tracks amounts paid rather than the number of shares bought on
each purchase of Class B shares, the number of Class B shares eligible to
convert to Class A shares (excluding shares acquired through the automatic
reinvestment of dividends and other distributions) (the Eligible Shares) will be
determined on each conversion date in accordance with the following formula: (i)
the ratio of (a) the amounts paid for Class B shares purchased at least seven
years prior to the conversion date to (b) the total amount paid for all Class B
shares purchased and then held in your account (ii) multiplied by the total
number of Class B shares then in your account. Each time any Eligible Shares in
your account convert to Class A shares, all shares or amounts representing Class
B shares then in your account that were acquired through the automatic
reinvestment of dividends and other distributions will convert to Class A
shares.
For purposes of determining the number of Eligible Shares, if the Class B
shares in your account on any conversion date are the result of multiple
purchases at different net asset values per share, the number of Eligible Shares
calculated as described above will generally be either more or less than the
number of shares actually purchased approximately seven years before such
conversion date. For example, if 100 shares were initially purchased at $10 per
share (for a total of $1,000) and a second purchase of 100 shares was
subsequently made at $11 per share (for a total of $1,100), 95.24 shares would
convert approximately seven years from the initial purchase (i.e., $1,000
divided by $2,100 (47.62%) multiplied by 200 shares equals 95.24 shares). The
Manager reserves the right to modify the formula for determining the number of
Eligible Shares in the future as it deems appropriate on notice to shareholders.
Since annual distribution-related fees are lower for Class A shares than Class
B shares, the per share net asset value of the Class A shares may be higher than
that of the Class B shares at the time of conversion. Thus, although the
aggregate dollar value will be the same, you may receive fewer Class A shares
than Class B shares converted. See "How the Fund Values its Shares."
For purposes of calculating the applicable holding period for conversions, all
payments for Class B shares during a month will be deemed to have been made on
the last day of the month, or for Class B shares acquired through exchange, or a
series of exchanges, on the last day of the month in which the original payment
for purchases of such Class B shares was made. For Class B shares previously
exchanged for shares of a money market fund, the time period during which such
shares were held in the money market fund will be excluded. For example, Class B
shares held in a money market fund for one year will not convert to Class A
shares until approximately eight years from purchase. For purposes of measuring
the time period during which shares are held in a money market fund, exchanges
will be deemed to have been made on the last day of the month. Class B shares
acquired through exchange will convert to Class A shares after expiration of the
conversion period applicable to the original purchase of
25
<PAGE>
such shares. It is currently anticipated that the first conversion of Class B
shares will occur in or about January, 1995. At that time all amounts
representing Class B shares then outstanding beyond the applicable conversion
period will automatically convert to Class A shares together with all shares or
amounts representing Class B shares acquired through the automatic reinvestment
of dividends and distributions then held in your account.
The conversion feature may be subject to the continuing availability of
opinions of counsel or rulings of the Internal Revenue Service that (i) the
dividends and other distributions paid on Class A, Class B and Class C shares
will not constitute "preferential dividends" under the Internal Revenue Code and
(ii) the conversion of shares does not constitute a taxable event. The
conversion of Class B shares into Class A shares may be suspended if such
opinions or rulings are no longer available. If conversions are suspended, Class
B shares of the Fund will continue to be subject, possibly indefinitely, to
their higher annual distribution and service fee.
HOW TO EXCHANGE YOUR SHARES
AS A SHAREHOLDER OF THE FUND, YOU HAVE AN EXCHANGE PRIVILEGE WITH CERTAIN
OTHER PRUDENTIAL MUTUAL FUNDS (THE EXCHANGE PRIVILEGE), INCLUDING ONE OR MORE
SPECIFIED MONEY MARKET FUNDS, SUBJECT TO THE MINIMUM INVESTMENT REQUIREMENTS OF
SUCH FUNDS. CLASS A, CLASS B AND CLASS C SHARES OF THE FUND MAY BE EXCHANGED FOR
CLASS A, CLASS B AND CLASS C SHARES, RESPECTIVELY, OF ANOTHER FUND ON THE BASIS
OF THE RELATIVE NAV. Any applicable CDSC payable upon the redemption of shares
exchanged will be calculated from the first day of the month after the initial
purchase, excluding the time shares were held in a money market fund. Class B
and Class C shares may not be exchanged into money market funds other than
Prudential Special Money Market Fund. For purposes of calculating the holding
period applicable to the Class B conversion feature, the time period during
which Class B shares were held in a money market fund will be excluded. See
"Conversion Feature--Class B Shares" above. If your investment in shares of
Prudential Mututal Funds (excluding money market funds other than those acquired
pursuant to the exchange privilege) reach $1 million and you then hold Class B
and/or Class C shares of the Fund which are free of CDSC, you will be so
notified and offered the opportunity to exchange those shares for Class A shares
of the Fund without the imposition of any sales charge. In the case of
tax-exempt shareholders, if no response is received within 60 days of the
mailing of such notice, eligible Class B and/or Class C shares will be
automatically exchanged for Class A shares. All other shareholders must
affirmatively elect to have their eligible Class B and/or Class C shares
exchanged for Class A shares. An exchange will be treated as a redemption and
purchase for tax purposes. See "Shareholder Investment Account--Exchange
Privilege" in the Statement of Additional Information.
IN ORDER TO EXCHANGE SHARES BY TELEPHONE, YOU MUST AUTHORIZE TELEPHONE
EXCHANGES ON YOUR INITIAL APPLICATION FORM OR BY WRITTEN NOTICE TO THE TRANSFER
AGENT AND HOLD SHARES IN NON-CERTIFICATE FORM. Thereafter, you may call the Fund
at (800) 225-1852 to execute a telephone exchange of shares, weekdays, except
holidays, between the hours of 8:00 A.M. and 6:00 P.M., New York time. For your
protection and to prevent fraudulent exchanges, your telephone call will be
recorded and you will be asked to provide your personal identification number. A
written confirmation of the exchange transaction will be sent to you. NEITHER
THE FUND NOR ITS AGENTS WILL BE LIABLE FOR ANY LOSS, LIABILITY OR COST WHICH
RESULTS FROM ACTING UPON INSTRUCTIONS REASONABLY BELIEVED TO BE GENUINE UNDER
THE FOREGOING PROCEDURES. All exchanges will be made on the basis of the
relative NAV of the two funds next determined after the request is received in
good order. The Exchange Privilege is available only in states where the
exchange may legally be made.
IF YOU HOLD SHARES THROUGH PRUDENTIAL SECURITIES, YOU MUST EXCHANGE YOUR
SHARES BY CONTACTING YOUR PRUDENTIAL SECURITIES FINANCIAL ADVISER.
IF YOU HOLD CERTIFICATES, THE CERTIFICATES, SIGNED IN THE NAME(S) SHOWN ON THE
FACE OF THE CERTIFICATES, MUST BE RETURNED IN ORDER FOR THE SHARES TO BE
EXCHANGED. SEE "HOW TO SELL YOUR SHARES" ABOVE.
You may also exchange shares by mail by writing to Prudential Mutual Fund
Services, Inc., Attention: Exchange Processing, P.O. Box 15010, New Brunswick,
New Jersey 08906-5010.
26
<PAGE>
IN PERIODS OF SEVERE MARKET OR ECONOMIC CONDITIONS THE TELEPHONE EXCHANGE OF
SHARES MAY BE DIFFICULT TO IMPLEMENT AND YOU SHOULD MAKE EXCHANGES BY MAIL BY
WRITING TO PRUDENTIAL MUTUAL FUND SERVICES, INC., AT THE ADDRESS NOTED ABOVE.
The Exchange Privilege may be modified or terminated at any time on 60 days'
notice to shareholders.
SHAREHOLDER SERVICES
In addition to the Exchange Privilege, as a shareholder in the Fund, you can
take advantage of the following additional services and privileges:
- AUTOMATIC REINVESTMENT OF DIVIDENDS AND/OR DISTRIBUTIONS WITHOUT A SALES
CHARGE. For your convenience, all dividends and distributions are automatically
reinvested in full and fractional shares of the Fund at NAV without a sales
charge. You may direct the Transfer Agent in writing not less than 5 full
business days prior to the record date to have subsequent dividends and/or
distributions sent in cash rather than reinvested. If you hold shares through
Prudential Securities, you should contact your financial adviser.
- AUTOMATIC SAVINGS ACCUMULATION PLAN (ASAP). Under ASAP you may make regular
purchases of the Fund's shares in amounts as little as $100 via an automatic
debit to a bank account or Prudential Securities account (including a Command
Account). For additional information about this service, you may contact your
Prudential Securities financial adviser, Prusec registered representative or the
Transfer Agent directly.
- TAX-DEFERRED RETIREMENT PLANS. Various tax-deferred retirement plans,
including a 401(k) plan, self-directed individual retirement accounts and
"tax-sheltered accounts" under Section 403(b)(7) of the Internal Revenue Code
are available through the Distributor. These plans are for use by both
self-employed individuals and corporate employers. These plans permit either
self-direction of accounts by participants, or a pooled account arrangement.
Information regarding the establishment of these plans, the administration,
custodial fees and other details is available from Prudential Securities or the
Transfer Agent. If you are considering adopting such a plan, you should consult
with your own legal or tax adviser with respect to the establishment and
maintenance of such a plan.
- SYSTEMATIC WITHDRAWAL PLAN. A systematic withdrawal plan is available to
shareholders which provides for monthly or quarterly checks. Withdrawals of
Class B and Class C shares may be subject to a CDSC. See "How to Sell Your
Shares-- Contingent Deferred Sales Charges" above. See also "Shareholder
Investment Account--Systematic Withdrawal Plan" in the Statement of Additional
Information."
- REPORTS TO SHAREHOLDERS. The Fund will send to you annual and semi-annual
reports and an annual prospectus; the financial statements appearing in annual
reports are audited by independent accountants. In order to reduce duplicate
mailing and printing expenses, the Fund will provide one annual and semi-annual
shareholder report and annual prospectus per household. You may request
additional copies of such reports by calling (800) 225-1852 or by writing to the
Fund at One Seaport Plaza, New York, New York 10292. In addition, monthly
unaudited financial data are available upon request from the Fund.
- SHAREHOLDER INQUIRIES. Inquiries should be addressed to the Fund at One
Seaport Plaza, New York, New York 10292, or by telephone, at (800) 225-1852
(toll-free) or, from outside the U.S.A., at (908) 417-7555 (collect).
For additional information regarding the services and privileges described
above, see "Shareholder Investment Account" in the Statement of Additional
Information.
27
<PAGE>
THE PRUDENTIAL MUTUAL FUND FAMILY
Prudential Mutual Fund Management offers a broad range of mutual funds
designed to meet your individual needs. We welcome you to review the investment
options available through our family of funds. For more information on the
Prudential Mutual Funds, including charges and expenses, contact your Prudential
Securities financial adviser or Prusec registered representative or telephone
the Funds at (800) 225-1852 for a free prospectus. Read the prospectus carefully
before you invest or send money.
TAXABLE BOND FUNDS
Prudential Adjustable Rate Securities Fund, Inc.
Prudential GNMA Fund, Inc.
Prudential Government Income Fund, Inc.
Prudential Government Securities Trust
Intermediate Term Series
Prudential High Yield Fund, Inc.
Prudential Structured Maturity Fund, Inc.
Income Portfolio
Prudential U.S. Government Fund
The BlackRock Government Income Trust
TAX-EXEMPT BOND FUNDS
Prudential California Municipal Fund
California Series
California Income Series
Prudential Municipal Bond Fund
High Yield Series
Insured Series
Modified Term Series
Prudential Municipal Series Fund
Arizona Series
Florida Series
Georgia Series
Maryland Series
Massachusetts Series
Michigan Series
Minnesota Series
New Jersey Series
New York Series
North Carolina Series
Ohio Series
Pennsylvania Series
Prudential National Municipals Fund, Inc.
GLOBAL FUNDS
Prudential Global Fund, Inc.
Prudential Global Genesis Fund, Inc.
Prudential Global Natural Resources Fund, Inc.
Prudential Intermediate Global Income Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Prudential Short-Term Global Income Fund, Inc.
Global Assets Portfolio
Short-Term Global Income Portfolio
Global Utility Fund, Inc.
EQUITY FUNDS
Prudential Equity Fund, Inc.
Prudential Equity Income Fund
Prudential Allocation Fund
Conservatively Managed Portfolio
Strategy Portfolio
Prudential Growth Opportunity Fund, Inc.
Prudential IncomeVertible-R- Fund, Inc.
Prudential Multi-Sector Fund, Inc.
Prudential Strategist Fund, Inc.
Prudential Utility Fund, Inc.
Nicholas-Applegate Fund, Inc.
Nicholas-Applegate Growth Equity Fund
MONEY MARKET FUNDS
- -TAXABLE MONEY MARKET FUNDS
Prudential Government Securities Trust
Money Market Series
U.S. Treasury Money Market Series
Prudential Special Money Market Fund
Money Market Series
Prudential MoneyMart Assets
- -TAX-FREE MONEY MARKET FUNDS
Prudential Tax-Free Money Fund
Prudential California Municipal Fund
California Money Market Series
Prudential Municipal Series Fund
Connecticut Money Market Series
Massachusetts Money Market Series
New Jersey Money Market Series
New York Money Market Series
- -COMMAND FUNDS
Command Money Fund
Command Government Fund
Command Tax-Free Fund
- -INSTITUTIONAL MONEY MARKET FUNDS
Prudential Institutional Liquidity Portfolio, Inc.
Institutional Money Market Series
A-1
<PAGE>
No dealer, sales representative or any other person has been authorized to give
any information or to make any representations, other than those contained in
this Prospectus, in connection with the offer contained herein, and, if given or
made, such other information or representations must not be relied upon as
having been authorized by the Fund or the Distributor. This Prospectus does not
constitute an offer by the Fund or by the Distributor to sell or a solicitation
of any offer to buy any of the securities offered hereby in any jurisdiction to
any person to whom it is unlawful to make such offer in such jurisdiction.
-------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
FUND HIGHLIGHTS......................................................... 2
FUND EXPENSES........................................................... 4
FINANCIAL HIGHLIGHTS.................................................... 5
HOW THE FUND INVESTS.................................................... 7
Investment Objective and Policies..................................... 7
Hedging and Income Enhancement Strategies............................. 9
Other Investments and Policies........................................ 11
Investment Restrictions............................................... 12
HOW THE FUND IS MANAGED................................................. 13
Manager............................................................... 13
Distributor........................................................... 13
Portfolio Transactions................................................ 15
Custodian and Transfer and Dividend Disbursing Agent.................. 15
HOW THE FUND VALUES ITS SHARES.......................................... 15
HOW THE FUND CALCULATES PERFORMANCE..................................... 16
TAXES, DIVIDENDS AND DISTRIBUTIONS...................................... 16
GENERAL INFORMATION..................................................... 18
Description of Common Stock........................................... 18
Additional Information................................................ 19
SHAREHOLDER GUIDE....................................................... 19
How to Buy Shares of the Fund......................................... 19
Alternative Purchase Plan............................................. 20
How to Sell Your Shares............................................... 22
Conversion Feature--Class B Shares.................................... 25
How to Exchange Your Shares........................................... 26
Shareholder Services.................................................. 27
THE PRUDENTIAL MUTUAL FUND FAMILY....................................... A-1
</TABLE>
-------------------------------------------
MF102A 440002K
Class A: 743915-20-9
CUSIP No.: Class B: 743915-10-0
Class C:
Prudential
GNMA Fund, Inc.
- --------------------------------------
[Logo]
<PAGE>
PROSPECTUS
February ,
1994
<PAGE>
PRUDENTIAL GNMA FUND, INC.
STATEMENT OF ADDITIONAL INFORMATION
DATED , 1994
Prudential GNMA Fund, Inc. (the Fund), is an open-end, diversified
management investment company whose investment objective is to achieve a high
level of income over the long term consistent with providing reasonable safety
in the value of each shareholder's investment. In pursuing this objective, the
Fund will invest primarily in mortgage-backed securities guaranteed as to timely
payment of principal and interest by the Government National Mortgage
Association (GNMA) and other readily marketable fixed-income securities. The
Fund will also write covered call and put options on U.S. Government securities
and enter into closing purchase and sale transactions with respect to certain of
such options. To hedge against changes in interest rates, the Fund may also
purchase put options and engage in transactions involving interest rate futures
contracts, options on such contracts and interest rate swap contracts. See
"Investment Objective and Policies."
The Fund's address is One Seaport Plaza, New York, New York 10292, and its
telephone number is (800) 225-1852.
This Statement of Additional Information is not a prospectus and should be
read in conjunction with the Fund's Prospectus, dated , 1994, a copy of
which may be obtained from the Fund upon request.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
CROSS-REFERENCE
TO PAGE IN
PAGE PROSPECTUS
--------- -------------------
<S> <C> <C>
General Information and History.................................................................. B-2 18
Investment Objective and Policies................................................................ B-2 7
Investment Restrictions.......................................................................... B-9 12
Directors and Officers........................................................................... B-10 12
Manager.......................................................................................... B-13 13
Distributor...................................................................................... B-14 13
Portfolio Transactions and Brokerage............................................................. B-16 15
Purchase and Redemption of Fund Shares........................................................... B-17 19
Shareholder Investment Account................................................................... B-20 26
Net Asset Value.................................................................................. B-23 15
Dividends and Distributions...................................................................... B-24 16
Taxes............................................................................................ B-24 16
Performance Information.......................................................................... B-25 16
Custodian, Transfer and Dividend Disbursing Agent and Independent Accountants.................... B-27 15
Financial Statements............................................................................. B-28 --
Report of Independent Accountants................................................................ B-37 --
Tax Information.................................................................................. B-37
Appendix......................................................................................... A-1 --
</TABLE>
- --------------------------------------------------------------------------------
MF102B
<PAGE>
GENERAL INFORMATION AND HISTORY
At a special meeting held on _________, 1994, shareholders approved an
amendment to the Fund's Articles of Incorporation to change the Fund's name from
Prudential-Bache GNMA Fund, Inc. to Prudential GNMA Fund, Inc.
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to achieve a high level of income over
the long term consistent with providing reasonable safety in the value of each
shareholder's investment. In pursuing this objective it is expected that, under
normal market conditions, the Fund will invest at least 65% of its total assets
in securities backed by the Government National Mortgage Association (GNMA). The
Fund also intends to invest in other mortgage-backed securities and other
readily marketable fixed-income securities which provide attractive yields but
which do not involve substantial risk of loss of capital through default, and
may engage in the writing of covered put and call options, closing and purchase
and sale transactions with respect to such options and interest rate futures and
options thereon. For a further description of the Fund's investment objective
and policies, see "How the Fund Invests--Investment Objective and Policies" in
the Prospectus.
GNMA SECURITIES. The Fund's investments are expected to consist principally
of purchases of GNMA securities. A description of their characteristics follows.
GNMA CERTIFICATES. Certificates of the Government National Mortgage
Association (GNMA Certificates) are mortgage-backed securities, which evidence
an undivided interest in a pool or pools of mortgages. GNMA Certificates differ
from bonds in that principal is repaid monthly by the borrower over the term of
the loan rather than returned in a lump sum at maturity. GNMA Certificates that
the Fund purchases are the "modified pass-through" type. "Modified pass-through"
GNMA Certificates entitle the holder to receive timely payment of all interest
and principal payments due on the mortgage pool, net of fees paid to the
"issuer" and GNMA regardless of whether or not the mortgagor actually makes the
payment. The GNMA Certificates will represent a PRO RATA interest in one or more
pools of the following types of mortgage loans: (i) fixed rate level payment
mortgage loans; (ii) fixed rate graduated payment mortgage loans; (iii) fixed
rate growing equity mortgage loans; (iv) fixed rate mortgage loans secured by
manufactured (mobile) homes; (v) mortgage loans on multifamily residential
properties under construction; (vi) mortgage loans on completed multifamily
projects; (vii) fixed rate mortgage loans as to which escrowed funds are used to
reduce the borrower's monthly payments during the early years of the mortgage
loans ("buydown" mortgage loans); (viii) mortgage loans that provide for
adjustments in payments based on periodic changes in interest rates or in other
payment terms of the mortgage loans; and (ix) mortgage-backed serial notes. All
of these mortgage loans will be FHA Loans or VA Loans and, except as otherwise
specified above, will be fully-amortizing loans secured by first liens on
one-to-four-family housing units.
GNMA GUARANTEE. The National Housing Act authorizes GNMA to guarantee the
timely payment of principal and interest on securities backed by a pool of
mortgages insured by the Federal Housing Administration (FHA) or the Farmers'
Home Administration (FMHA), or guaranteed by the Veterans Administration (VA).
The GNMA guarantee is backed by the full faith and credit of the United States.
The GNMA is also empowered to borrow without limitation from the U.S. Treasury
if necessary to make any payments required under its guarantee.
LIFE OF GNMA CERTIFICATES. The average life of a GNMA Certificate is likely
to be substantially shorter than the original maturity of the mortgages
underlying the securities. Prepayments of principal by mortgagors and mortgage
foreclosures will usually result in the return of the greater part of principal
investment long before the maturity of the mortgages in the pool. Foreclosures
impose no risk to principal investment because of the GNMA guarantee, except to
the extent that the Fund has purchased the certificates above par in the
secondary market.
As prepayment rates of individual mortgage pools vary widely, it is not
possible to predict accurately the average life of a particular issue of GNMA
Certificates. However, statistics published by the FHA indicate that the average
life of single-family dwelling mortgages with 25-to 30-year maturities, the type
of mortgages backing the vast majority of GNMA Certificates, is approximately 12
years. Therefore, it is customary to treat GNMA Certificates as 30-year
mortgage-backed securities which prepay fully in the twelfth year. The
prepayment experience of the underlying mortgage pool also affects the actual
yield of a GNMA Certificate. For example, if the higher-yielding mortgages from
the pool are prepaid, the yield on the remaining pool will be reduced.
Mortgage-backed securities are often subject to more rapid repayment than
their stated maturity date would indicate as a result of the pass-through of
prepayments of principal on the underlying mortgage obligations. During periods
of declining
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interest rates, prepayment of mortgages underlying mortgage-backed securities
can be expected to accelerate. Accordingly, the Fund's ability to maintain
positions in high-yielding mortgage-backed securities will be affected by
reductions in the principal amount of such securities resulting from such
prepayments, and its ability to reinvest the returns of principal at comparable
yields is subject to generally prevailing interest rates at that time. The
Fund's net asset value will vary with changes in the values of the Fund's
portfolio securities. Such values will vary with changes in market interest
rates generally and the differentials in yields among various kinds of United
States Government securities.
COLLATERALIZED MORTGAGE OBLIGATIONS. Certain issuers of mortgage-backed
obligations (CMOs), including certain CMOs that have elected to be treated as
Real Estate Mortgage Investment Conduits (REMICS), are not considered investment
companies pursuant to a Rule recently adopted by the Securities and Exchange
Commission (SEC), and the Fund may invest in the securities of such issuers
without the limitations imposed by the Investment Company Act of 1940 (ICA) on
investments by the Fund in other investment companies. In addition, in reliance
on an earlier SEC interpretation, the Fund's 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 ICA and
(d) are not registered or regulated under the ICA as investment companies. To
the extent that the Fund selects CMOs or REMICs that cannot rely on the Rule or
do not meet the above requirements, the Fund 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.
LENDING OF PORTFOLIO SECURITIES. The Fund may lend its portfolio securities
without limit to broker-dealers, banks or other recognized institutional
borrowers of securities, provided that the borrower at all times maintains cash
or equivalent collateral or secures a letter of credit in favor of the Fund
equal in value to at least 100% of the value of the securities loaned. During
the time portfolio securities are on loan, the borrower pays the Fund an amount
equivalent to any interest paid on such securities, and the Fund may invest the
cash collateral and earn additional income, or it may receive an agreed-upon
amount of interest income from the borrower who has delivered equivalent
collateral or secured a letter of credit. Loans are subject to termination at
the option of the Fund or the borrower. The Fund may pay reasonable
administrative and custodial fees in connection with a loan and may pay a
negotiated portion of the interest earned on the cash or equivalent collateral
to the borrower or placing broker. The Fund does not have the right to vote
securities on loan, but would terminate the loan and regain the right to vote if
that were considered important with respect to the investment.
REPURCHASE AGREEMENTS. The Fund's repurchase agreements will be
collateralized by U.S. Government obligations. The Fund will enter into
repurchase transactions only with parties meeting creditworthiness standards
approved by the Fund's Board of Directors. The Fund's investment adviser will
monitor the creditworthiness of such parties, under the general supervision of
the Board of Directors. In the event of a default or bankruptcy by a seller, the
Fund will promptly seek to liquidate the collateral. To the extent that the
proceeds from any sale of such collateral upon a default in the obligation to
repurchase are less than the repurchase price, the Fund will suffer a loss.
The Fund participates in a joint repurchase account with other investment
companies managed by Prudential Mutual Fund Management, Inc. (PMF) pursuant to
an order of the SEC. On a daily basis, any uninvested cash balances of the Fund
may be aggregated with those of such investment companies and invested in one or
more repurchase agreements. Each fund participates in the income earned or
accrued in the joint account based on the percentage of its investment.
PORTFOLIO TURNOVER. The portfolio turnover rates in 1993 and 1992 were 134%
and 33%, respectively. Based on its experience in managing generally similar
investment products, the investment adviser expects that, under normal
circumstances, if the Fund writes a substantial number of options, and those
options are exercised, the Fund's portfolio turnover rate may be as high as or
exceed 250%. The portfolio turnover rate is, generally, the percentage computed
by dividing the lesser of portfolio purchases or sales, excluding short-term
investments, by the average value of the portfolio. While the Fund will pay
commissions in connection with its options and futures transactions, U.S.
Government securities are generally traded on a "net" basis with dealers acting
as principal for their own accounts without a stated commission. Nevertheless,
high portfolio turnover may involve correspondingly greater brokerage
commissions and other transaction costs, which will be borne directly by the
Fund. See "Portfolio Transactions and Brokerage."
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ILLIQUID SECURITIES
The Fund may invest up to 15% of its net assets in illiquid securities
including repurchase agreements which have a maturity of longer than seven days,
securities with legal or contractual restrictions on resale (restricted
securities) and securities that are not readily marketable. Restricted
securities eligible for resale pursuant to Rule 144A under the Securities Act of
1933, as amended (the "Securities Act"), that have a readily available market
are not considered illiquid for purposes of this limitation. The Subadviser will
monitor the liquidity of such restricted securities under the supervision of the
Board of Directors. Repurchase agreements subject to demand are deemed to have a
maturity equal to the notice period.
The staff of the SEC has also taken the position that purchased
over-the-counter options and the assets used as "cover" for written
over-the-counter options are illiquid securities unless the Fund and the
counterparty have provided for the Fund at its option to unwind the OTC option.
The exercise of such an option ordinarily would involve the payment by the Fund
of an amount designed to reflect the counterparty's economic loss from an early
termination, but does allow the Fund to treat the assets used as "cover" as
"liquid."
Historically, illiquid securities have included securities subject to
contractual or legal restrictions on resale because they have not been
registered under the 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 typically have
not held a significant amount of 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 and corporate bonds and notes. Institutional investors depend on an
efficient institutional market in which the unregistered security can be readily
resold or on an issuer's ability to honor a demand for repayment. The fact that
there are contractual or legal restrictions on resale to the general public or
to certain institutions may not be indicative of the liquidity of such
investments.
Rule 144A 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 foreign convertible securities will expand further as a result of this
new 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 NASD.
The investment adviser will monitor the liquidity of restricted securities
in the Fund's portfolio under the supervision of the Board of Directors. In
reaching liquidity decisions, the investment adviser will consider, INTER ALIA,
the following factors:
1.__the frequency of trades and quotes for the security;
2.__the number of dealers wishing to purchase or sell the security and the
number of potential purchasers;
3.__dealer undertakings to make a market in the security; and
4.__the nature of the security and the nature of the marketplace trades
(E.G., the time needed to dispose of the security, the method of soliciting
offers and the mechanics of the transfer).
OPTION WRITING AND RELATED RISKS
CHARACTERISTICS
The Fund may write (I.E., sell) covered put and call options on U.S.
Government securities which are traded on registered securities exchanges (the
Exchanges) or which result from separate, privately negotiated transactions with
primary U.S. Government securities dealers recognized by the Board of Governors
of the Federal Reserve System (OTC options). A call option
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gives the purchaser of the option the right to buy, and the writer the
obligation to sell, the underlying security at the exercise price during the
option period. Conversely, a put option gives the purchaser the right to sell,
and the writer the obligation to buy, the underlying security at the exercise
price during the option period.
So long as the obligation of the writer of the option continues, the writer
is subject to the exercise of the option, either by the assignment of an
exercise notice by the broker-dealer through whom the option was sold in the
case of an exchange-traded option or directly by notice from the holder in the
case of an OTC option. Upon exercise the Fund is required to deliver, in the
case of a call, or take delivery of, in the case of a put, the underlying
security against payment of the exercise price. This obligation terminates upon
expiration of the option, or at such earlier time that the Fund effects a
closing purchase transaction, either by purchasing an option covering the same
underlying security and having the same exercise price and expiration date (of
the same series) as that on which it desires to terminate its obligation or by
terminating the option contract through separate negotiation. The effect of such
closing purchase is that the writer's position will be cancelled. Once an
exchange-traded option has been exercised, the writer may not execute a closing
purchase transaction with respect thereto. Effecting closing purchase
transactions in OTC options is subject to negotiation between the Fund and the
holder of the option.
The principal reason for writing options on a securities portfolio is to
attempt to realize, through the receipt of premiums, a greater current return
than would be realized on the underlying securities alone. The premium paid by
the purchaser of an option will reflect, among other things, the relationship of
the exercise price to the market price and volatility of the underlying
security, the remaining term of the option, supply and demand and interest
rates. In return for the premium, the covered call option writer has given up
the opportunity for profit from a price increase in the underlying security
above the exercise price so long as the option remains open, but retains the
risk of loss should the price of the security decline. Conversely, the put
option writer gains a profit, in the form of the premium, so long as the price
of the underlying security remains above the exercise price, but assumes an
obligation to purchase the underlying security from the buyer of the put option
at the exercise price even though the price of the security may fall below the
exercise price, at any time during the option period. If an option expires, the
writer realizes a gain in the amount of the premium. Such a gain may, in the
case of a covered call option, be offset by a decline in the market value of the
underlying security during the option period. If a call option is exercised, the
writer realizes a gain or loss from the sale of the underlying security. If a
put option is exercised, the writer must fulfill its obligation to purchase the
underlying security at the exercise price, which will usually exceed the then
current market value of the underlying security. The Fund would then incur a
loss equal to the difference between the price at which it is required to
purchase the underlying security and its market value at the time the option is
exercised, less the premium received for writing the option. If the Fund is able
to enter into a closing purchase transaction, it will realize a profit or loss
from such transaction if the cost of such transaction is less or more than the
premium received from writing the option.
Because the Fund may write only covered options, it may at times be unable
to write additional options unless it sells a portion of its portfolio holdings
to obtain new debt securities against which it can write options. This may
result in higher portfolio turnover and correspondingly greater brokerage
commissions and other transaction costs.
PURCHASING OPTIONS
The Fund may purchase put options in an effort to protect the value of a
security that it owns against a decline in market value, and may also purchase
put or call options for the purpose of offsetting previously written put or call
options of the same series. For a further description of such transactions see
"How the Fund Invests--Hedging and Income Enhancement Strategies--Options
Transactions" in the Prospectus.
RISKS AND LIMITATIONS PERTAINING TO OPTIONS TRANSACTIONS
When the Fund enters into options transactions as a hedge against its
portfolio of mortgage securities, it intends to use OTC options because there is
currently no GNMA option listed on a national securities exchange. There is
currently no secondary market for OTC options.
Exchange-traded options are currently available for other U.S. Government
securities. An exchange-traded option position may be closed out only on an
Exchange that provides a secondary market for an option of the same series. OTC
options are not generally terminable at the option of the writer and may be
closed out only by negotiation with the holder. There is no assurance that a
liquid secondary market on an exchange will exist. In addition, because OTC
options are issued in privately negotiated transactions exempt from registration
under the Securities Act of 1933, there is no assurance that the Fund will
succeed in negotiating a closing out of an OTC option for any particular option
at any particular time. In such event, it might not be possible
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to effect closing transactions in particular options. If the Fund, as a covered
call option writer, is unable to effect a closing purchase transaction in the
secondary market or otherwise, it will not be able to sell the underlying
security until the option expires or it delivers the underlying security upon
exercise.
Reasons for the absence of a liquid secondary market on an exchange include
the following: (i) insufficient trading interest in certain options; (ii)
restrictions on transactions imposed by an Exchange; (iii) trading halts,
suspensions or other restrictions imposed with respect to particular classes or
series of options or underlying securities; (iv) interruption of the normal
operations on an exchange; (v) inadequacy of the facilities of an exchange or a
clearing corporation to handle current trading volume; or (vi) a decision by one
or more exchanges to discontinue the trading of options (or a particular class
or series of options), in which event the secondary market on that exchange (or
in that class or series of options) would cease to exist, although outstanding
options on that exchange that had been issued by a clearing corporation as a
result of trades on that exchange would generally continue to be exercisable in
accordance with their terms.
The Fund's ability to write exchange-traded options on U.S. Government
securities is subject to limitations established by each of the applicable
exchanges governing the maximum number of options in each class which may be
written by a single investor or group of investors acting in concert, regardless
of whether the options are written on the same or different exchanges or are
held or written in one or more accounts or through one or more brokers. Thus,
the number of exchange-traded options which the Fund may write may be limited by
options written by other investment advisory clients of its investment adviser.
An exchange may order the liquidation of positions found to be in excess of
these limits, and it may impose certain other sanctions.
The hours of trading for options on U.S. Government securities may not
conform to the hours during which the underlying securities are traded. To the
extent that the option markets close before the markets for the underlying
securities, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
SPECIAL CONSIDERATIONS APPLICABLE TO OPTIONS
ON TREASURY BONDS AND NOTES. Because trading interest in Treasury Bonds and
Notes tends to center on the most recently auctioned issues, the Exchanges will
not indefinitely continue to introduce new series of options with expirations to
replace expiring options on particular issues. Instead, the expirations
introduced at the commencement of options trading on a particular issue will be
allowed to run their course, with the possible addition of a limited number of
new expirations as the original ones expire. Options trading on each series of
Bonds or Notes will thus be phased out as new options are listed on the more
recent issues, and a full range of expiration dates will not ordinarily be
available for every series on which options are traded.
ON TREASURY BILLS. Because the deliverable Treasury Bill changes from week
to week, writers of Treasury Bill call options cannot provide in advance for
their potential exercise settlement obligations by acquiring and holding the
underlying security. However, if the Fund holds a long position in Treasury
Bills with a principal amount corresponding to the option contract size, the
Fund may be hedged from a risk standpoint, although the long position may be in
Treasury Bills with maturities varying from those on which the options were
written. The Fund will maintain in a segregated account with its custodian
Treasury Bills maturing no later than those which would be deliverable in the
event of an assignment of an exercise notice to ensure that it can meet its open
option obligations.
ON MORTGAGE CERTIFICATES. Options on Mortgage Certificates are not currently
traded on any exchange. However, the Fund intends to engage in transactions in
OTC options on Mortgage Certificates.
Since the remaining principal balance of Mortgage Certificates declines each
month as a result of mortgage principal payments and prepayments, the Fund, as a
writer of a covered Mortgage call option holding Mortgage Certificates as
"cover" to satisfy its delivery obligation in the event that the option is
exercised, may find that its Mortgage Certificates no longer have a sufficient
remaining principal balance for this purpose. Should this occur, the Fund will
attempt to effect a closing purchase transaction or will purchase additional
Mortgage Certificates from the same pool (if obtainable) or replacement Mortgage
Certificates in the cash market in order to remain covered.
INTEREST RATE FUTURES AND OPTIONS THEREON
INTEREST RATE FUTURES CONTRACTS. The Fund may purchase and sell interest
rate futures contracts (futures contracts) that are traded on U.S. commodities
exchanges as a hedge against interest rate related fluctuations in the value of
securities which are held in the Fund's portfolio or which the Fund intends to
purchase. The Fund will engage in such transactions consistent with the Fund's
investment objective. Currently futures contracts are available on several types
of fixed income securities, including
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U.S. Treasury Bonds, U.S. Treasury Notes and on U.S. Treasury Bills and
Certificates of Deposit on the International Monetary Market Division of the
Chicago Mercantile Exchange. The Fund may also purchase and sell Eurodollar
futures and options thereon which are U.S. dollar denominated instruments linked
to the London Interbank rate and currently traded on the Chicago Mercantile
Exchange.
There are a number of reasons why entering into interest rate futures
contracts for hedging purposes can be beneficial to the Fund. First, futures
markets may be more liquid than the corresponding cash markets on the underlying
securities. Such enhanced liquidity results from the standardization of the
futures contracts and the large transaction volumes. Greater liquidity permits a
portfolio manager to effect a desired hedge both more quickly and in greater
volume than would be possible in the cash market. Second, a desired sale and
subsequent purchase can generally be accomplished in the futures market for a
fraction of the transaction costs that might be incurred in the cash market.
When a purchase or sale of an interest rate futures contract occurs, a
deposit of high quality, liquid securities called "initial margin" is made by
both buyer and seller with a custodian or otherwise for the benefit of the
broker. Unlike other types of margin, a futures margin account does not involve
any loan or borrowing but is merely a good faith deposit that must be maintained
in a minimum amount of cash or U.S. Treasury Bills, currently equal to 2% of the
contract amount for futures on Treasury Bonds, 1 1/2% of the contract amount for
futures on Treasury Notes, 1/10 of 1% of the contract amount for futures on
Treasury Bills and 2% for GNMA securities. All futures positions, both long and
short, are marked-to-market daily, with cash payments called "variation margin"
being made by buyers and sellers to the custodian, and passed through to the
sellers and buyers, to reflect daily changes in contract values.
Although most interest rate futures contracts call for making or taking
delivery of the underlying securities, these obligations are typically cancelled
or closed out before the scheduled settlement date. The closing is accomplished
by purchasing (or selling) an identical futures contract to offset a short (or
long) position. Such an offsetting transaction cancels the contractual
obligations established by the original futures transaction. Other financial
futures contracts call for cash settlements rather than delivery of securities.
If the price of an offsetting futures transaction varies from the price of
the original futures transaction, the hedger will realize a gain or loss
corresponding to the difference. That gain or loss will tend to offset the
unrealized loss or gain on the hedged securities position, but may not always or
completely do so.
In accordance with current rules of the Commodity Futures Trading Commission
(the CFTC), the Fund may not purchase or sell any interest rate futures
contracts or options thereon for return enhancement or risk management purposes
if, immediately thereafter, the sum of initial margin deposits on the Fund's
futures positions and premiums paid for options thereon would exceed 5% of the
liquidation value of the Fund's total assets. The Fund may purchase and sell
futures contracts and options thereon for bona fide hedging purposes without
limitation.
RISKS AND LIMITATIONS INVOLVED IN FUTURES HEDGING. There are a number of
risks associated with futures hedging. Changes in the price of a futures
contract generally parallel but do not necessarily equal changes in the prices
of the securities being hedged. The risk of imperfect correlation increases as
the composition of the Fund's securities portfolio diverges from the securities
that are the subject of the futures contract. Because the change in 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.
The Fund intends to purchase and sell futures contracts only on exchanges
where there appears to be a market in such futures sufficiently active to
accommodate the volume of its trading activity. There can be no assurance that a
liquid market will always exist for any particular contract at any particular
time. Accordingly, there can be no assurance that it will always be possible to
close a futures position when such closing is desired and, in the event of
adverse price movements, the Fund would continue to be required to make daily
cash payments of variation margin. However, in the event futures contracts 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.
Successful use of futures contracts by the Fund is also subject to the
ability of the investment adviser to predict correctly movements in the
direction of interest rates and other factors affecting markets for securities.
For example, if the Fund has hedged against the possibility of an increase in
interest rates that would adversely affect the price of securities in its
portfolio and prices of such securities increase instead, the Fund will lose
part or all of the benefit of the increased value of its securities
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because it will have offsetting losses in its futures positions. In addition, in
such situations, if the Fund has insufficient cash to meet daily variation
margin requirements, it may have to sell securities to meet such requirements.
Such sales of securities may be, but will not necessarily be, at increased
prices that reflect the rising market. The Fund may have to sell securities at a
time when it is disadvantageous to do so. Where futures are purchased to hedge
against a possible increase in the price of securities before the Fund is able
to invest its cash in an orderly fashion, it is possible that the market may
decline instead; if the Fund then concludes not to invest in securities at that
time because of concern as to possible further market decline or for other
reasons, the Fund will realize a loss on the futures contract that is not offset
by a reduction in the price of the securities purchased.
The selling of futures contracts by the Fund and use of related transactions
in options on futures contracts (discussed below) are subject to position
limits, which are affected by the activities of the Fund's investment adviser,
similar to the option trading limits discussed under "Option Writing and Related
Risks".
The hours of trading of interest rate futures contracts may not conform to
the hours during which the Fund may trade U.S. Government securities. To the
extent that the futures markets close before the U.S. Government securities
markets, significant price and rate movements can take place in the U.S.
Government securities markets that cannot be reflected in the futures markets.
Pursuant to Rule 4.5 under the Commodity Exchange Act, investment companies
registered under the Investment Company Act, are exempted from the definition of
"commodity pool operator" in the Commodity Exchange Act, subject to compliance
with certain conditions. The exemption is conditioned upon a requirement that
all of the investment company's commodity futures transactions and options
thereon constitute BONA FIDE hedging transactions, except that the Fund may
purchase and sell futures and options thereon for any other purpose to the
extent that the aggregate initial margin and option premiums do not exceed 5% of
the liquidation value of the Fund's total assets. With respect to long positions
assumed by the Fund, the Fund will segregate with its custodian, or in a margin
account with a broker, an amount of cash and other assets permitted by CFTC
regulations equal to the market value of the futures contracts and thereby
insure that the use of futures contracts is unleveraged. The Fund will use
interest rate futures in a manner consistent with these requirements.
OPTIONS ON FUTURES CONTRACTS. The Fund will purchase put options on futures
contracts to hedge its portfolio of debt securities against the risk of rising
interest rates, and the consequent decline in the prices of U.S. Government
securities it owns. The Fund will also write call options on futures contracts
as a hedge against a modest decline in prices of debt securities held in the
Fund's portfolio. If the futures price at expiration of a written call option is
below the exercise price, the Fund will retain the full amount of the option
premium, thereby partially hedging against any decline that may have occurred in
the Fund's holdings of debt securities. If the futures price when the option is
exercised is above the exercise price, however, the Fund will incur a loss,
which may be wholly or partially offset by the increase of the value of the
security in the Fund's portfolio which was being hedged.
INTEREST RATE TRANSACTIONS
The Fund may enter into interest rate swaps, and will usually enter into
interest rate swaps on a net basis, I.E., the two payment streams are netted
out, with the Fund receiving or paying, as the case may be, only the net amount
of the two payments. The net amount of the excess, if any, of the Fund's
obligations over its entitlements with respect to each interest rate swap will
be accrued on a daily basis and an amount of cash or liquid high-grade debt
securities having an aggregate net asset value at least equal to the accrued
excess will be maintained in a segregated account by a custodian that satisfies
the requirements of the Investment Company Act. To the extent that the Fund
enters into interest rate swaps on other than a net basis, the amount maintained
in a segregated account will be the full amount of the Fund's obligations, if
any, with respect to such interest rate swaps, accrued on a daily basis.
Inasmuch as segregated accounts are established for these hedging transactions,
the investment adviser and the Fund believe such obligations do not constitute
senior securities and, accordingly, will not treat them as being subject to its
borrowing restrictions. The Fund will not enter into any interest rate swaps
unless the short-term debt of the other party thereto is rated in the highest
rating category of at least one nationally recognized rating organization at the
time of entering into such transaction. If there is a default by the other party
to such a transaction, the Fund 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.
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The use of interest rate swaps is a highly speculative activity which
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. If incorrect in its forecast of
market values, interest rates and other applicable factors, the investment
performance of the Fund would diminish compared to what it would have been if
this investment technique was never used.
The Fund 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 rates swaps is limited to the net amount of interest payments that the
Fund is contractually obligated to make. If the other party to an interest rate
swap defaults, the Fund's risk of loss consists of the net amount of interest
payments that the Fund is contractually entitled to receive. Since interest rate
swaps are individually negotiated, the Fund 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.
INVESTMENT RESTRICTIONS
The following restrictions are fundamental policies, which cannot be changed
without the approval of the holders of a majority of the Fund's outstanding
voting securities. A "majority of the Fund's outstanding voting securities"
means the lesser of (1) 67% of the Fund's shares represented at a meeting at
which more than 50% of the outstanding shares are present in person or
represented by proxy, or (2) more than 50% of the Fund's outstanding shares.
The Fund may not:
(1) Purchase any security (other than obligations of the U.S. Government,
its agencies, or instrumentalities) if as a result with respect to 75% of the
Fund's total assets, more than 5% of the Fund's total assets (taken at current
value) would then be invested in securities of a single issuer.
(2) Make short sales of securities or purchase securities on margin (but the
Fund may obtain such short-term credits as may be necessary for the clearance of
transactions). For purposes of this investment restriction, the deposit or
payment by the Fund of initial or variation margin in connection with
transactions in interest rate futures contracts or related options transactions
and collateralization arrangements with respect to exchange-traded and OTC
options on debt securities are not considered the purchase of a security on
margin.
(3) Concentrate its investments in any one industry (no more than 25% of the
Fund's total assets will be invested in any one industry or in the securities of
issuers located in any one foreign country); however, there is no limitation as
to investments in obligations of the U.S. Government, its agencies or
instrumentalities.
(4) Issue senior securities, borrow money or pledge its assets, except that
the Fund may borrow up to 20% of the value of its total assets (calculated when
the loan is made) for temporary, extraordinary or emergency purposes or for the
clearance of transactions. The Fund may pledge up to 20% of the value of its
total assets to secure such borrowings. For purposes of this restriction,
obligations of the Fund to Directors pursuant to deferred compensation
arrangements, the purchase or sale of securities on a when-issued or delayed
delivery basis, the purchase and sale of options and futures contracts and
collateral arrangements with respect to the purchase and sale of options and
futures contracts are not deemed to be the issuance of a senior security or a
pledge of assets.
(5) Purchase any security if as a result the Fund would then have more than
5% of its total assets (taken at current value) invested in securities of
companies (including predecessors) less than three years old.
(6) Buy or sell commodities or commodity contracts, or real estate or
interests in real estate, except it may purchase and sell securities which are
secured by real estate and securities of companies which invest or deal in real
estate, interest rate futures contracts and other financial futures contracts
and options thereon.
(7) Act as underwriter except to the extent that, in connection with the
disposition of portfolio securities, it may be deemed to be an underwriter under
certain federal securities laws.
(8) Make investments for the purpose of exercising control or management.
(9) Invest in securities of other investment companies, except by purchases
in the open market involving only customary brokerage commissions and as a
result of which not more than 5% of its total assets (taken at current value)
would be invested in such securities, or except as part of a merger,
consolidation or other acquisition.
B-9
<PAGE>
(10) Invest in interests in oil, gas or other mineral exploration or
development programs.
(11) Make loans, except through (i) repurchase agreements and (ii) loans of
portfolio securities. (The purchase of a portion of an issue of securities
distributed publicly, whether or not the purchase is made on the original
issuance, is not considered the making of a loan.)
(12) Purchase securities of foreign issuers other than U.S. dollar
denominated debt securities rated at least Aa by Moody's or AA by S&P or U.S.
dollar denominated obligations of foreign branches of domestic banks or of any
bank organized under the laws of Canada, France, Germany, Japan, the
Netherlands, Switzerland or the United Kingdom, provided that such bank has, at
the time of the Fund's investment, total assets of at least $10 billion or the
equivalent.
(13) Purchase or sell puts or calls or combinations thereof, except that the
Fund may write covered put and call options on U.S. Government securities,
purchase put and call options on U.S. Government securities and purchase and
sell interest rate futures contracts and other financial futures contracts and
options thereon, and, in connection with the purchase of other securities, it
may acquire warrants or other rights to subscribe for securities of companies or
parents or subsidiaries of such companies.
Whenever any fundamental investment policy or investment restriction states
a maximum percentage of the Fund's assets, it is intended that if the percentage
limitation is met at the time the investment is made, a later change in
percentage resulting from changing total or net asset values will not be
considered a violation of such policy. However, in the event that the Fund's
asset coverage for borrowings falls below 300%, the Fund will take prompt action
to reduce its borrowings, as required by applicable law.
In order to comply with certain state "blue sky" restrictions, the Fund will
not as a matter of operating policy (i) purchase any security if as a result the
Fund would hold more than 10% of any class of securities of an issuer (taking
all debt issues of an issuer as a single class) in companies in which officers
and directors of the Fund or the manager own more than 1/2 of 1% of the
outstanding securities of such company or (ii) purchase warrants if as a result
the Fund would then have more than 5% of its net assets (determined at the time
of investment) invested in warrants. Warrants will be valued at the lower of
cost or market and investment in warrants which are not listed on the New York
Stock Exchange or American Stock Exchange will be limited to 2% of the Fund's
net assets (determined at the time of investment). For the purpose of this
limitation, warrants acquired in units or attached to securities are deemed to
be without value.
DIRECTORS AND OFFICERS
<TABLE>
<CAPTION>
POSITION PRINCIPAL OCCUPATIONS
NAME AND ADDRESS WITH FUND DURING PAST FIVE YEARS
- -------------------------------- -------------- -----------------------------------------------------------------------
<S> <C> <C>
Edward D. Beach Director President and Director of BMC Fund, Inc.; formerly, Vice Chairman of
c/o Prudential Mutual Fund Broyhill Furniture Industries, Inc.; Certified Public Accountant;
Management, Inc. Secretary and Treasurer of Broyhill Family Foundation, Inc.;
One Seaport Plaza President, Treasurer and Director of The High Yield Plus Fund, Inc.
New York, New York and The First Financial Fund, Inc.; Director of The Global Government
Plus Fund, Inc. and The Global Yield Fund, Inc.
Eugene C. Dorsey Director Retired President, Chief Executive Officer and Trustee of the Gannett
c/o Prudential Mutual Fund Foundation; former Publisher of four Gannett newspapers and Vice
Management, Inc. President of Gannett Company; past Chairman of Independent Sector
One Seaport Plaza (national coalition of philanthropic organizations) (since October
New York, New York 1989); former Chairman of the American Council for the Arts; Director
of the Regional Board of Chase Manhattan Bank of Rochester.
Delayne D. Gold Director Marketing and Management Consultant.
c/o Prudential Mutual Fund
Management, Inc.
One Seaport Plaza
New York, New York
</TABLE>
B-10
<PAGE>
<TABLE>
<CAPTION>
POSITION PRINCIPAL OCCUPATIONS
NAME AND ADDRESS WITH FUND DURING PAST FIVE YEARS
- -------------------------------- -------------- -----------------------------------------------------------------------
<S> <C> <C>
*Harry A. Jacobs, Jr. Director Senior Director (since January 1986) of Prudential Securities; formerly
One Seaport Plaza Interim Chairman and Chief Executive Officer of Prudential Mutual
New York, New York Fund Management, Inc. (PMF) (June-September 1993); Chairman of the
Board of Prudential Securities (1982-1985) and Chairman of the Board
and Chief Executive Officer of Bache Group Inc. (1977-1982); Director
of the Center for National Policy, The First Australia Fund, Inc.,
The First Australia Prime Income Fund, Inc., The Global Government
Plus Fund, Inc. and The Global Yield Fund, Inc.; Trustee of the
Trudeau Institute.
*Lawrence C. McQuade President and Vice Chairman of PMF (since 1988); Managing Director, Investment
One Seaport Plaza Director Banking, of Prudential Securities (1988-1991); Director of Quixote
New York, New York Corporation (since February 1992); Director of BUNZL, PLC (since June
1991); formerly Director of Crazy Eddie Inc. (1987-1990) and Director
of Kaiser Tech. Ltd. and Kaiser Aluminum and Chemical Corp. (March
1987-November 1988); formerly Executive Vice President and Director
of W.R. Grace & Co.; President and Director of The High Yield Income
Fund, Inc., The Global Yield Fund, Inc. and The Global Government
Plus Fund, Inc.
Thomas T. Mooney Director President of the Greater Rochester Metro Chamber of Commerce; former
c/o Prudential Mutual Fund Rochester City Manager; Trustee of Center for Governmental Research,
Management, Inc. Inc.; Director of Blue Cross of Rochester, Monroe County Water
One Seaport Plaza Authority, Rochester Jobs, Inc., Northeast Midwest Institute,
New York, New York Executive Service Corps of Rochester and Monroe County Industrial
Development Corporation; Director of The First Financial Fund, Inc.,
The Global Government Plus Fund, Inc., The Global Yield Fund, Inc.
and The High Yield Plus Fund, Inc.
Thomas H. O'Brien Director President, O'Brien Associates (financial and management consultants)
c/o Prudential Mutual Fund (since April 1984); formerly, President of Jamaica Water Securities
Management, Inc. Corp. (holding company) (February 1989-August 1990), Director
One Seaport Plaza (September 1987-April 1991) and Chairman of the Board and Chief
New York, New York Executive Officer (September 1987-February 1989) of Jamaica Water
Supply Company; formerly, Director of Trans Canada Pipelines U.S.A.
Ltd. (1984-June 1989) and Winthrop University Hospital (November
1976-June 1988); Director of Ridgewood Savings Bank and Yankee Energy
System, Inc.; Secretary and Trustee of Hofstra University.
*Richard A. Redeker Director President, Chief Executive Officer and Director (since October 1993),
One Seaport Plaza PMF; Executive Vice President, Director and Member of the Operating
New York, New York Committee (since October 1993), Prudential Securities Incorporated;
Director (since October 1993) of Prudential Securities Group, Inc;
formerly Senior Executive Vice President and Director of Kemper
Financial Services, Inc. (September 1978-September 1993); Director of
The Global Government Plus Fund, Inc., and The High Yield Income
Fund, Inc.
Nancy H. Teeters Director Economist; formerly Vice President and Chief Economist (March 1986-June
c/o Prudential Mutual 1990) and Director of Economics (July 1984-February 1986),
Fund Management, Inc. International Business Machines Corporation (manufacturer of
One Seaport Plaza computers); Member of the Board of Governors of the Horace H. Rackman
New York, NY School of Graduate Studies of the University of Michigan; Director of
Global Utility Fund, Inc., The First Financial Fund, Inc. and The
Global Yield Fund, Inc.
</TABLE>
B-11
<PAGE>
<TABLE>
<CAPTION>
POSITION PRINCIPAL OCCUPATIONS
NAME AND ADDRESS WITH FUND DURING PAST FIVE YEARS
- -------------------------------- -------------- -----------------------------------------------------------------------
<S> <C> <C>
David W. Drasnin Vice President Vice President and Branch Manager of Prudential Securities.
39 Public Square
Wilkes-Barre, Pennsylvania
Robert F. Gunia Vice President Chief Administrative Officer (since July 1990), Director (since January
One Seaport Plaza 1989) and Executive Vice President, Treasurer and Chief Financial
New York, New York Officer (since June 1987) of PMF; Senior Vice President (since March
1987) of Prudential Securities; Vice President and Director of The
Asia Pacific Fund, Inc. (since May 1989).
S. Jane Rose Secretary Senior Vice President (since January 1991), Senior Counsel (since June
One Seaport Plaza 1987) and First Vice President (June 1987-December 1990) of PMF;
New York, New York Senior Vice President and Senior Counsel (since July 1992) of
Prudential Securities; formerly Vice President and Associate General
Counsel of Prudential Securities.
Susan C. Cote Treasurer and Senior Vice President (since January 1989) of PMF; Senior Vice
One Seaport Plaza Principal President (since January 1992) and Vice President (January
New York, New York Financial and 1986-December 1991) of Prudential Securities.
Accounting
Officer
Deborah A. Docs Assistant Vice President, Associate General Counsel (since January 1993),
One Seaport Plaza Secretary Associate Vice President (January 1990-December 1992), Assistant
New York, New York General Counsel (November 1991-December 1992) and Assistant Vice
President (January 1989-December 1989) of PMF; Vice President and
Associate General Counsel (since January 1993), Associate Vice
President (January 1992-December 1992) and Assistant General Counsel
(January 1992-January 1993) of Prudential Securities.
<FN>
- ------------------------
* "Interested" Director, as defined in the Investment Company Act, by reason of
his affiliation with Prudential Securities or PMF.
</TABLE>
Directors and officers of the Fund are also trustees, directors and officers
of some or all of the other investment companies distributed by Prudential
Securities or Prudential Mutual Fund Distributors, Inc. (PMFD).
The officers conduct and supervise the daily business operations of the
Fund, while the Directors, in addition to their functions set forth under
"Manager" and "Distributor," review such actions and decide on general policy.
The Fund pays each of its Directors who is not an affiliated person of the
Manager annual compensation of $7,500, in addition to certain out-of-pocket
expenses.
Mr. Beach receives his Director's fee pursuant to a deferred fee agreement
with the Fund. Under the terms of the agreement, the Fund accrues daily the
amount of such Director's fee which accrue interest at a rate equivalent to the
prevailing rate applicable to 90-day U.S. Treasury bills at the beginning of
each calendar quarter or, pursuant to an SEC exemptive order, at the daily rate
of return of the Fund. Payment of the interest so accrued is also deferred and
accruals become payable at the option of the Director. The Fund's obligation to
make payments of deferred Director's fees, together with interest thereon, is a
general obligation of the Fund.
As of March 31, 1994, the Directors and officers of the Fund, as a group,
owned less than 1% of the outstanding shares of common stock of the Fund.
As of March 31, 1994, Prudential Securities was the record holder for other
beneficial owners of 400,345 Class A shares (or 35% of the outstanding Class A
shares) and 7,143,766 Class B shares (or 57% of the outstanding Class B shares)
of the Fund. 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.
B-12
<PAGE>
MANAGER
The manager of the Fund is Prudential Mutual Fund Management, Inc. (PMF or
the Manager), One Seaport Plaza, New York, New York 10292. PMF serves as manager
to all of the other investment companies that, together with the Fund, comprise
the "Prudential Mutual Funds." See "How the Fund is Managed--Manager" in the
Prospectus. As of March 31, 1994, PMF managed and/or administered open-end and
closed-end management investment companies with assets of approximately $[51]
billion. According to the Investment Company Institute, as of December 31, 1993,
the Prudential Mutual Funds were the 12th largest family of mutual funds in the
United States.
Pursuant to the Management Agreement with the Fund (the Management
Agreement), PMF, subject to the supervision of the Fund's Board of Directors and
in conformity with the stated policies of the Fund, manages both the investment
operations of the Fund and the composition of the Fund's portfolio, including
the purchase, retention, disposition and loan of securities. In connection
therewith, PMF is obligated to keep certain books and records of the Fund. PMF
also administers the Fund's corporate affairs and, in connection therewith,
furnishes the Fund with office facilities, together with those ordinary clerical
and bookkeeping services which are not being furnished by State Street Bank and
Trust Company, the Fund's custodian, and Prudential Mutual Fund Services, Inc.
(PMFS or the Transfer Agent), the Fund's transfer and dividend disbursing agent.
The management services of PMF for the Fund are not exclusive under the terms of
the Management Agreement and PMF is free to, and does, render management
services to others.
For its services, PMF receives, pursuant to the Management Agreement, a fee
at an annual rate of .50 of 1% of the Fund's average daily net assets. The fee
is computed daily and payable monthly. The Management Agreement also provides
that, in the event the expenses of the Fund (including the fees of PMF, but
excluding interest, taxes, brokerage commissions, distribution fees and
litigation and indemnification expenses and other extraordinary expenses not
incurred in the ordinary course of the Fund's business) for any fiscal year
exceed the lowest applicable annual expense limitation established and enforced
pursuant to the statutes or regulations of any jurisdiction in which the Fund's
shares are qualified for offer and sale, the compensation due PMF will be
reduced by the amount of such excess. Reductions in excess of the total
compensation payable to PMF will be paid by PMF to the Fund. No such reductions
were required during the fiscal year ended December 31, 1993. Currently, the
Fund believes that the most restrictive expense limitation of state securities
commissions is 2 1/2% of the Fund's average daily net assets up to $30 million,
2% of the next $70 million of such assets and 1 1/2% of such assets in excess of
$100 million.
In connection with its management of the corporate affairs of the Fund, PMF
bears the following expenses:
(a) the salaries and expenses of all of its and the Fund's personnel except
the fees and expenses of Directors who are not affiliated persons of PMF or the
Fund's investment adviser;
(b) all expenses incurred by PMF or by the Fund in connection with managing
the ordinary course of the Fund's business, other than those assumed by the Fund
as described below; and
(c) the costs and expenses payable to The Prudential Investment Corporation
(PIC) pursuant to the subadvisory agreement between PMF and PIC (the Subadvisory
Agreement).
Under the terms of the Management Agreement, the Fund is responsible for the
payment of the following expenses: (a) the fees payable to the Manager, (b) the
fees and expenses of Directors who are not affiliated persons of the Manager or
the Fund's investment adviser, (c) the fees and certain expenses of the
Custodian and Transfer and Dividend Disbursing Agent, including the cost of
providing records to the Manager in connection with its obligation of
maintaining required records of the Fund and of pricing the Fund's shares, (d)
the charges and expenses of legal counsel and independent accountants for the
Fund, (e) brokerage commissions and any issue or transfer taxes chargeable to
the Fund in connection with its securities transactions, (f) all taxes and
corporate fees payable by the Fund to governmental agencies, (g) the fees of any
trade associations of which the Fund may be a member, (h) the cost of stock
certificates representing shares of the Fund, (i) the cost of fidelity and
liability insurance, (j) the fees and expenses involved in registering and
maintaining registration of the Fund and of its shares with the SEC, registering
the Fund and qualifying its shares under state securities laws, including the
preparation and printing of the Fund's registration statements and prospectuses
for such purposes, (k) allocable communications expenses with respect to
investor services and all expenses of shareholders' and Directors' meetings and
of preparing, printing and mailing reports, proxy statements and prospectuses to
shareholders in the amount necessary for distribution to the shareholders, (l)
litigation and indemnification expenses and other extraordinary expenses not
incurred in the ordinary course of the Fund's business and (m) distribution
fees.
B-13
<PAGE>
The Management Agreement provides that PMF will not be liable for any error
of judgment or for any loss suffered by the Fund in connection with the matters
to which the Management Agreement relates, except a loss resulting from willful
misfeasance, bad faith, gross negligence or reckless disregard of duty. The
Management Agreement provides that it will terminate automatically if assigned,
and that it may be terminated without penalty by either party upon not more than
60 days' nor less than 30 days' written notice. The Management Agreement will
continue in effect for a period of more than two years from the date of
execution only so long as such continuance is specifically approved at least
annually in conformity with the Investment Company Act. The Management Agreement
was last approved by the Board of Directors of the Fund, including all of the
Directors who are not parties to the contract or interested persons of any such
party as defined in the Investment Company Act, on May 4, 1994 and by
shareholders of the Fund on April 29, 1988.
For the fiscal years ended December 31, 1991, 1992 and 1993, PMF received
management fees of $1,233,921, $1,509,499 and $1,714,652, respectively.
PMF has entered into the Subadvisory Agreement with PIC (the Subadviser), a
wholly-owned subsidiary of The Prudential Insurance Company of America
(Prudential). The Subadvisory Agreement provides that PIC will furnish
investment advisory services in connection with the management of the Fund. In
connection therewith, PIC is obligated to keep certain books and records of the
Fund. PMF continues to have responsibility for all investment advisory services
pursuant to the Management Agreement and supervises PIC's performance of such
services. PIC is reimbursed by PMF for the reasonable costs and expenses
incurred by PIC in furnishing those services.
The Subadvisory Agreement was last approved by the Board of Directors,
including a majority of the Directors who are not interested persons of the Fund
and who have no direct or indirect financial interest in the Subadvisory
Agreement, on May 4, 1994, and by shareholders of the Fund on April 29, 1988.
The Subadvisory Agreement provides that it will terminate in the event of
its assignment (as defined in the Investment Company Act) or upon the
termination of the Management Agreement. The Subadvisory Agreement may be
terminated by the Fund, PMF or PIC upon not more than 60 days', nor less than 30
days', written notice. The Subadvisory Agreement provides that it will continue
in effect for a period of more than two years from its execution only so long as
such continuance is specifically approved at least annually in accordance with
the requirements of the Investment Company Act.
The Manager and the Subadviser are subsidiaries of The Prudential Insurance
Company of America (Prudential) which, as of December 31, 1993, was the largest
insurance company in the United States and the second largest insurance company
in the world. Prudential has been engaged in the insurance business since 1875.
[In July 1993, INSTITUTIONAL INVESTOR ranked Prudential the third largest
institutional money manager of the 300 largest money management organizations in
the United States as of December 31, 1992.]
DISTRIBUTOR
Prudential Mutual Fund Distributors, Inc. (PMFD), One Seaport Plaza, New
York, New York 10292, acts as the distributor of the Class A shares of the Fund.
Prudential Securities Incorporated, One Seaport Plaza, New York, New York 10292
(Prudential Securities), acts as the distributor of the Class B and Class C
shares of the Fund.
Pursuant to separate Distribution and Service Plans (the Class A Plan, the
Class B Plan and the Class C Plan, collectively, the Plans) adopted by the Fund
under Rule 12b-1 under the Investment Company Act and separate distribution
agreements (the Distribution Agreements), PMFD and Prudential Securities
(collectively, the Distributor) incur the expenses of distributing the Fund's
Class A, Class B and Class C shares. See "How the Fund is Managed--Distributor"
in the Prospectus.
Prior to January 22, 1990, the Fund offered only one class of shares (the
then existing Class B shares). On October 19, 1989, the Board of Directors,
including a majority of the Directors who are not interested persons of the Fund
and who have no direct or indirect financial interest in the operation of the
Class A or Class B Plan or in any agreement related to either Plan (the Rule
12b-1 Directors), at a meeting called for the purpose of voting on each Plan,
adopted a new plan of distribution for the Class A shares of the Fund (the Class
A Plan) and approved an amended and restated plan of distribution with respect
to the Class B shares of the Fund (the Class B Plan). On May 6, 1993, the
Directors, including a majority of the Rule12b-1 Directors, at a meeting called
for the purpose of voting on each Plan, approved the continuance of the Plans
and Distribution Agreements and approved modifications of the Fund's Class A and
Class B Plans and Distribution Agreements to conform them with recent amendments
to the National Association of Securities Dealers, Inc. (NASD) maximum sales
charge rule described below. As so modified, the Class A Plan provides that (i)
up to .25 of 1% of the average daily net assets of the Class A shares may be
used to
B-14
<PAGE>
pay for personal service and/or the maintenance of shareholder accounts (service
fee) and (ii) total distribution fees (including the service fee of .25 of 1%)
may not exceed .30 of 1%. As so modified, the Class B Plan provides that (i) up
to .25 of 1% of the average daily net assets of the Class B shares may be paid
as a service fee and (ii) up to .75 of 1% of the average daily net assets of the
Class B shares (asset-based sales charge) may be used as reimbursement for
distribution-related expenses with respect to the Class B shares. The aggregate
distribution fee for Class B shares (asset-based sales charge plus service fee)
may not exceed .75 of 1% of the average daily net assets of Class B shares. On
May 6, 1993, the Board of Directors, including a majority of the Rule 12b-1
Directors, at a meeting called for the purpose of voting on each Plan, adopted a
plan of distribution for the Class C shares of the Fund and approved further
amendments to the plans of distribution for the Fund's Class A and Class B
shares changing them from reimbursement type plans to compensation type plans.
The Plans were last approved by the Board of Directors, including a majority of
the Rule 12b-1 Directors, on May 4, 1994. The Class A Plan, as amended, was
approved by the Class A and Class B shareholders and the Class B Plan, as
amended, was approved by Class B shareholders on ______, 1994. The Class C Plan
was approved by the sole shareholder of the Class C shares on _______, 1994.
CLASS A PLAN. For the fiscal year ended December 31, 1993, PMFD received
payments of $15,299 under the Class A Plan as reimbursement of expenses related
to the distribution of Class A shares. This amount was expended on commission
credits to Prudential Securities and Pruco Securities Corporation, an affiliated
broker-dealer (Prusec) for payments of commissions and account servicing fees to
financial advisers and other persons who sell Class A shares.
In addition, for the fiscal year ended December 31, 1993, PMFD received
approximately $131,000 in initial sales charges.
CLASS B PLAN. For the fiscal year ended December 31, 1993, the Distributor
received $2,495,486 from the Fund under the Class B Plan. It is estimated that
the Distributor spent approximately $2,744,800 on behalf of the Fund during such
period. It is estimated that of the latter amount approximately $2,800 or 0.1%
was spent on printing and mailing of prospectuses to other than current
shareholders; $1,209,000 or 44.1% on compensation to Prusec for commissions to
its financial advisers and other expenses, including an allocation on account of
overhead and other branch office distribution-related expenses, incurred by it
for distribution of Fund shares; ($409,800 or 14.9%) in interest and/or carrying
charges; and $1,123,200 or 40.9% on the aggregate of (i) payments of commissions
to financial advisers ($596,500 or 21.7%) and (ii) an allocation on account of
overhead and other branch office distribution-related expenses ($526,700 or
19.2%). 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 Fund shares, including lease costs, the
salaries and employee benefits of operations and sales support personnel,
utility costs, communications costs and the costs of stationery and supplies,
(b) the costs of client sales seminars, (c) expenses of mutual fund sales
coordinators to promote the sale of Fund shares and (d) other incidental
expenses relating to branch promotion of Fund sales.
Prudential Securities also receives the proceeds of contingent deferred
sales charges paid by holders of Class B shares upon certain redemptions of
Class B shares. See "Shareholder Guide--How to Sell Your Shares--Contingent
Deferred Sales Charges" in the Prospectus. For the fiscal year ended December
31, 1993, Prudential Securities received approximately $504,000 in contingent
deferred sales charges.
CLASS C PLAN. Prudential Securities receives the proceeds of contingent
deferred sales charges paid by investors upon certain redemptions of Class C
shares. See "Shareholder Guide--How to Sell Your Shares--Contingent Deferred
Sales Charges" in the Prospectus. Prior to the date of this Statement of
Additional Information, no distribution expenses were incurred under the Class C
Plan.
The Class A, Class B and Class C Plans continue in effect from year to year,
provided that each such continuance is approved at least annually by a vote of
the Board of Directors, including a majority vote of the Rule 12b-1 Directors,
cast in person at a meeting called for the purpose of voting on such
continuance. The Plans may each be terminated at any time, without penalty, by
the vote of a majority of the Rule 12b-1 Directors or by the vote of the holders
of a majority of the outstanding shares of the applicable class on not more than
30 days' written notice to any other party to the Plans. The Plans may not be
amended to increase materially the amounts to be spent for the services
described therein without approval by the shareholders of the applicable class
(by both Class A and Class B shareholders, voting separately, in the case of
material amendments to the Class A Plan), and all material amendments are
required to be approved by the Board of Directors in the manner described above.
Each Plan will automatically terminate in the event of its assignment. The Fund
will not be contractually obligated to pay expenses incurred under any Plan if
they are terminated or not continued.
B-15
<PAGE>
Pursuant to each Plan, the Board of Directors will review at least quarterly
a written report of the distribution expenses incurred on behalf of each class
of shares of the Fund by the Distributor. The report includes an itemization of
the distribution expenses and the purposes of such expenditures. In addition, as
long as the Plans remain in effect, the selection and nomination of Rule 12b-1
Directors shall be committed to the Rule 12-b-1 Directors.
Pursuant to each Distribution Agreement, the Fund has agreed to indemnify
PMFD and Prudential Securities to the extent permitted by applicable law against
certain liabilities under the Securities Act of 1933, as amended. Each
Distribution Agreement was last approved by the Board of Directors, including a
majority of the Rule 12b-1 Directors, on May 4, 1994.
NASD MAXIMUM SALES CHARGE RULE. Pursuant to rules of the NASD, the
Distributor is required to limit aggregate initial sales charges, deferred sales
charges and asset-based sales charges to 6.25% of total gross sales of each
class of shares. In the case of Class B shares, interest charges on unreimbursed
distribution expenses equal to the prime rate plus one percent per annum may be
added to the 6.25% limitation. Sales from the reinvestment of dividends and
distributions are not included in the calculation of the 6.25% limitation. The
annual asset-based sales charge on shares of the Fund may not exceed .75 of 1%
per class. The 6.25% limitation applies to each class of the Fund rather than on
a per shareholder basis. If aggregate sales charges were to exceed 6.25% of
total gross sales of any class, all sales charges on shares of that class would
be suspended.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Manager is responsible for decisions to buy and sell securities and
futures contracts for the Fund, the selection of brokers, dealers and futures
commission merchants to effect the transactions and the negotiation of brokerage
commissions, if any. For purposes of this section, the term "Manager" includes
the "Subadviser". Fixed-income securities are generally traded on a "net" basis
with dealers acting as principal for their own accounts without a stated
commission, although the price of the security usually includes a profit to the
dealer. In underwritten offerings, securities are purchased at a fixed price
which includes an amount of compensation to the underwriter, generally referred
to as the underwriter's concession or discount. On occasion, certain money
market instruments may be purchased directly from an issuer, in which case no
commissions or discounts are paid. The Fund will not deal with Prudential
Securities in any transaction in which Prudential Securities acts as principal.
Purchases and sales of securities or futures contracts on a securities exchange
or board of trade will be effected through brokers or futures commission
merchants who charge a commission for their services. Orders may be directed to
any broker or futures commission merchant including, to the extent and in the
manner permitted by applicable law, Prudential Securities and its affiliates.
In placing orders for portfolio securities of the Fund, the Manager is
required to give primary consideration to obtaining the most favorable price and
efficient execution. This means that the Manager will seek to execute each
transaction at a price and commission, if any, which provide the most favorable
total cost or proceeds reasonably attainable in the circumstances. While the
Manager generally seeks reasonably competitive spreads or commissions, the Fund
will not necessarily be paying the lowest spread or commission available. Within
the framework of the policy of obtaining the most favorable price and efficient
execution, the Manager will consider research and investment services provided
by brokers, dealers or futures commission merchants who effect or are parties to
portfolio transactions of the Fund, the Manager or the Manager's other clients.
Such research and investment services are those which brokerage houses
customarily provide to institutional investors and include statistical and
economic data and research reports on particular companies and industries. Such
services are used by the Manager in connection with all of its investment
activities, and some of such services obtained in connection with the execution
of transactions for the Fund may be used in managing other investment accounts.
Conversely, brokers, dealers or futures commission merchants furnishing such
services may be selected for the execution of transactions of such other
accounts, whose aggregate assets are far larger than the Fund, and the services
furnished by such brokers, dealers or futures commission merchant may be used by
the Manager in providing investment management for the Fund. Commission rates
are established pursuant to negotiations with the broker, dealer or futures
commission merchant based on the quality and quantity of execution services
provided by the broker, dealer or futures commission merchant in the light of
generally prevailing rates. The Manager's policy is to pay higher commissions to
brokers, dealers and futures commission merchants, other than Prudential
Securities, for particular transactions than might be charged if a different
broker, dealer or futures commission merchant had been selected, on occasions
when, in the Manager's opinion, this policy furthers the objective of obtaining
best price and execution. In addition, the Manager is authorized to pay higher
commissions on brokerage transactions for the Fund to brokers, dealers and
futures commission merchants other than Prudential Securities in order to secure
research and investment services described above, subject to the primary
consideration of obtaining the most favorable price and efficient execution in
the circumstances and subject to review by the Fund's Board of Directors from
time to time as to the extent and continuation of this practice. The allocation
of orders among brokers, dealers and futures commission merchants and the
commission rates paid are reviewed periodically by the Fund's Board of
Directors. Portfolio securities may not
B-16
<PAGE>
be purchased from any underwriting or selling syndicate of which Prudential
Securities (or any affiliate), during the existence of the syndicate, is a
principal underwriter (as defined in the Investment Company Act), except in
accordance with rules of the SEC. This limitation, in the opinion of the Fund,
will not significantly affect the Fund's ability to pursue its present
investment objective. However, in the future in other circumstances, the Fund
may be at a disadvantage because of this limitation in comparison to other funds
with similar objectives but not subject to such limitations.
Subject to the above considerations, the Manager may use Prudential
Securities as a broker or futures commission merchant for the Fund. In order for
Prudential Securities (or any affiliate) to effect any portfolio transactions
for the Fund, the commissions, fees or other remuneration received by Prudential
Securities (or any affiliate) must be reasonable and fair compared to the
commissions, fees or other remuneration paid to other brokers or futures
commission merchants in connection with comparable transactions involving
similar securities or futures being purchased or sold on an exchange or board of
trade during a comparable period of time. This standard would allow Prudential
Securities (or any affiliate) to receive no more than the remuneration which
would be expected to be received by an unaffiliated broker or futures commission
merchant in a commensurate arm's-length transaction. Furthermore, the Board of
Directors of the Fund, including a majority of the Rule 12b-1 Directors, has
adopted procedures which are reasonably designed to provide that any
commissions, fees or other remuneration paid to Prudential Securities (or any
affiliate) are consistent with the foregoing standard. In accordance with
Section 11(a) under the Securities Exchange Act of 1934, Prudential Securities
may not retain compensation for effecting transactions on a national securities
exchange for the Fund unless the Fund has expressly authorized the retention of
such compensation. Prudential Securities must furnish to the Fund at least
annually a statement setting forth the total amount of all compensation retained
by Prudential Securities from transactions effected for the Fund during the
applicable period. Brokerage transactions with Prudential Securities (or any
affiliate) are also subject to such fiduciary standards as may be imposed upon
Prudential Securities (or such affiliate) by applicable law. During the years
ended December 31, 1993, 1992 and 1991, no brokerage commissions were paid by
the Fund to Prudential Securities.
PURCHASE AND REDEMPTION OF FUND SHARES
Shares of the Fund may be purchased at a price equal to the next determined
net asset value per share plus a sales charge which, at the election of the
investor, may be imposed either (i) at the time of purchase (Class A shares) or
(ii) on a deferred basis (Class B or Class C shares). See "Shareholder
Guide--How to Buy Shares of the Fund" in the Prospectus.
Each class of shares represents an interest in the same portfolio of
investments of the Fund and has the same rights, except that (i) each class
bears the separate expenses of its Rule 12b-1 distribution and service plan,
(ii) each class has exclusive voting rights with respect to its plan (except
that the Fund has agreed with the Securities and Exchange Commission in
connection with the offering of a conversion feature on Class B shares to submit
any amendment of the Class A distribution and service plan to both Class A and
Class B shareholders) and (iii) only Class B shares have a conversion feature.
See "Distributor." Each class also has separate exchange privileges. See
"Shareholder Investment Account--Exchange Privilege."
B-17
<PAGE>
SPECIMEN PRICE MAKE-UP
Under the current distribution arrangements between the Fund and the
Distributor, Class A shares of the Fund are sold at a maximum sales charge of 4%
and Class B* and Class C* shares of the Fund are sold at net asset value. Using
the Fund's net asset value at December 31, 1993, the maximum offering price of
the Fund's shares is as follows:
<TABLE>
<S> <C>
CLASS A
Net asset value and redemption price per Class A share................... $ 14.75
---------
Maximum sales charge (4% of offering price).............................. .61
---------
Offering price to public................................................. 15.36
---------
---------
CLASS B
Net asset value, offering and redemption price per Class B share*........ $ 14.71
---------
---------
CLASS C
Net asset value, offering price and redemption price per Class C
share*.................................................................. $ 14.71
---------
---------
<FN>
- ------------------------
* Class B and Class C shares are subject to a contingent deferred sales charge
on certain redemptions. See "Shareholder Guide--How to Sell Your
Shares--Contingent Deferred Sales Charges" in the Prospectus.
</TABLE>
REDUCTION AND WAIVER OF INITIAL SALES CHARGES--CLASS A SHARES
RIGHTS OF ACCUMULATION. Reduced sales charges are also available through
Rights of Accumulation, under which an investor or an eligible group of related
investors, as described below under "Combined Purchase and Cumulative Purchase
Privilege," may aggregate the value of their existing holdings of shares of the
Fund and shares of other Prudential Mutual Funds (excluding money market funds
other than those acquired pursuant to the exchange privilege) to determine the
reduced sales charge. However, the value of shares held directly with the
Transfer Agent and through Prudential Securities will not be aggregated to
determine the reduced sales charge. All shares must be held either directly with
the Transfer Agent or through Prudential Securities. The value of existing
holdings for purposes of determining the reduced sales charge is calculated
using the maximum offering price (net asset value plus maximum sales charge) as
of the previous business day. See "How the Fund Values its Shares" in the
Prospectus. The Distributor must be notified at the time of purchase that the
investor is entitled to a reduced sales charge. The reduced sales charges will
be granted subject to confirmation of the investor's holdings. Rights of
accumulation are not available to individual participants in any retirement or
group plans.
LETTER OF INTENT. Reduced sales charges are available to investors (or an
eligible group of related investors) who enter into a written Letter of Intent
providing for the purchase, within a thirteen-month period, of shares of the
Fund and shares of other Prudential Mutual Funds. All shares of the Fund and
shares of other Prudential Mutual Funds (excluding money market funds other than
those acquired pursuant to the exchange privilege) which were previously
purchased and are still owned are also included in determining the applicable
reduction. However, the value of shares held directly with the Transfer Agent
and through Prudential Securities will not be aggregated to determine the
reduced sales charge. All shares must be held either directly with the Transfer
Agent or through Prudential Securities. The Distributor must be notified at the
time of purchase that the investor is entitled to a reduced sales charge. The
reduced sales charge will be granted subject to confirmation of the investor's
holdings. Letters of Intent are not available to individual participants in
retirement or group plans.
A Letter of Intent permits a purchaser to establish a total investment goal
to be achieved by any number of investments over a thirteen-month period. Each
investment made during the period will receive the reduced sales charge
applicable to the amount represented by the goal, as if it were a single
investment. Escrowed Class A shares totaling 5% of the dollar amount of the
Letter of Intent will be held by the Transfer Agent in the name of the
purchaser. The effective date of a Letter of Intent may be back-dated up to 90
days, in order that any investments made during this 90-day period, valued at
the purchaser's cost, can be applied to the fulfillment of the Letter of Intent
goal.
The Letter of Intent does not obligate the investor to purchase, nor the
Fund to sell, the indicated amount. In the event the Letter of Intent goal is
not achieved within the thirteen-month period, the purchaser is required to pay
the difference between the sales charge otherwise applicable to the purchases
made during this period and sales charges actually paid. Such payment may be
made directly to the Distributor or, if not paid, the Distributor will liquidate
sufficient escrowed shares to obtain such
B-18
<PAGE>
difference. If the goal is exceeded in an amount which qualifies for a lower
sales charge, a price adjustment is made by refunding to the purchaser the
amount of excess sales charge, if any, paid during the thirteen-month period.
Investors electing to purchase Class A shares of the Fund pursuant to a Letter
of Intent should carefully read such Letter of Intent.
COMBINED PURCHASE AND CUMULATIVE PURCHASE PRIVILEGE. If an investor or
eligible group of related investors purchases Class A shares of the Fund
concurrently with Class A shares of other Prudential Mutual Funds, the purchases
may be combined to take advantage of the reduced sales charges applicable to
larger purchases. See the table of breakpoints under "Shareholder
Guide--Alternative Purchase Plan" in the Prospectus.
An eligible group of related Fund investors includes any combination of the
following:
(a) an individual;
(b) the individual's spouse, their children and their parents;
(c) the individual's and spouse's Individual Retirement Account (IRA);
(d) any company controlled by the individual (a person, entity or group that
holds 25% or more of the outstanding voting securities of a company will be
deemed to control the company, and a partnership will be deemed to be controlled
by each of its general partners);
(e) a trust created by the individual, the beneficiaries of which are the
individual, his or her spouse, parents or children;
(f) a Uniform Gifts to Minors Act/Uniform Transfers to Minors Act account
created by the individual or the individual's spouse; and
(g) one or more employee benefit plans of a company controlled by an
individual.
[In addition, an eligible group of related Fund investors may include an
employer (or group of related employers) and one or more qualified retirement
plans of such employer or employers (an employer controlling, controlled by or
under common control with another employer is deemed related to that employer).]
The Distributor must be notified at the time of purchase that the investor
is entitled to a reduced sales charge. The reduced sales charge will be granted
subject to confirmation of the investor's holdings. The Combined Purchase and
Cumulative Purchase Privilege does not apply to individual participants in the
retirement and group plans described above under "Retirement and Group Plans."
QUANTITY DISCOUNT--CLASS B SHARES PURCHASED PRIOR TO _____, 1994
The CDSC is reduced on redemptions of Class B shares of the Fund purchased
prior to ____, 1994 if immediately after a purchase of such shares, the
aggregate cost of all Class B shares of the Fund owned by you in a single
account exceeded $500,000. For example, if you purchased $100,000 of Class B
shares of the Fund and the following year purchase an additional $450,000 of
Class B shares with the result that the aggregate cost of your Class B shares of
the Fund following the second purchase was $550,000, the quantity discount would
be available for the second purchase of $450,000 but not for the first purchase
of $100,000. The quantity discount will be imposed at the following rates
depending on whether the aggregate value exceeded $500,000 or $1 million:
<TABLE>
<CAPTION>
Contingent Deferred Sales Charge
as a Percentage of Dollars Invested
or Redemption Proceeds
----------------------------------------
Year Since Purchase $500,001 to $1
Payment Made million Over $1 million
- ------------------------------------------------------ --------------------- -----------------
<S> <C> <C>
First................................................. 3.0% 2.0%
Second................................................ 2.0% 1.0%
Third................................................. 1.0% 0%
Fourth and thereafter................................. 0% 0%
</TABLE>
You must notify the Fund's Transfer Agent either directly or through
Prudential Securities or Prusec, at the time of redemption, that you are
entitled to the reduced CDSC. The reduced CDSC will be granted subject to
confirmation of your holdings.
B-19
<PAGE>
SHAREHOLDER INVESTMENT ACCOUNT
Upon the initial purchase of Fund shares, a Shareholder Investment Account
is established for each investor under which a record of the shares held is
maintained by the Transfer Agent. If a 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. Whenever a transaction takes place
in the Shareholder Investment Account, the shareholder will be mailed a
statement showing the transaction and the status of the Account. The Fund makes
available to the shareholders the following privileges and plans.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND/OR DISTRIBUTIONS
For the convenience of investors, all dividends and distributions are
automatically reinvested in full and fractional shares of the Fund of the Class
on which it was paid at net asset value. An investor may direct the Transfer
Agent in writing not less than 5 full business days prior to the record date to
have subsequent dividends and/or distributions sent in cash rather than
reinvested. In the case of recently purchased shares for which registration
instructions have not been received on the record date, cash payment will be
made directly to the dealer. Any shareholder who receives a cash payment
representing a dividend or distribution may reinvest such distribution at net
asset value by returning the check or the proceeds to the Transfer Agent within
30 days after the payment date. Such investment will be made at the net asset
value per share next determined after receipt of the check or proceeds by the
Transfer Agent.
EXCHANGE PRIVILEGE
The Fund makes available to its shareholders the privilege of exchanging
their shares of the Fund for shares of certain other Prudential Mutual Funds,
including one or more specified money market funds, subject in each case to the
minimum investment requirements of such funds. Shares of such other Prudential
Mutual Funds may also be exchanged for shares of the Fund. All exchanges are
made on the basis of relative net asset value next determined after receipt of
an order in proper form. An exchange will be treated as a redemption and
purchase for tax purposes. Shares may be exchanged for shares of another fund
only if shares of such fund may legally be sold under applicable state laws. For
retirement and group plans having a limited menu of Prudential Mutual Funds, the
Exchange Privilege is available for those funds eligible for investment in the
particular program.
It is contemplated that the exchange privilege may be applicable to new
mutual funds whose shares may be distributed by the Distributor.
CLASS A. Shareholders of the Fund may exchange their Class A shares for
Class A shares of certain other Prudential Mutual Funds, shares of Prudential
Government Securities Trust (Intermediate Term Series) and shares of the money
market funds specified below. No fee or sales load will be imposed upon the
exchange. Shareholders of money market funds who acquired such shares upon
exchange of Class A shares may use the Exchange Privilege only to acquire Class
A shares of the Prudential Mutual Funds participating in the Exchange Privilege.
The following money market funds participate in the Class A Exchange
Privilege:
Prudential California Municipal Fund
(California Money Market Series)
Prudential Government Securities Trust
(Money Market Series)
(U.S. Treasury Money Market Series)
Prudential Municipal Series Fund
(Connecticut Money Market Series)
(Massachusetts Money Market Series)
(New Jersey Money Market Series)
(New York Money Market Series)
Prudential MoneyMart Assets
Prudential Tax-Free Money Fund
CLASS B AND CLASS C. Shareholders of the Fund may exchange their Class B and
Class C shares for Class B and Class C shares, respectively, of certain other
Prudential Mutual Funds and shares of Prudential Special Money Market Fund, a
money market fund. No CDSC will be payable upon such exchange but a CDSC may be
payable upon the redemption of the Class B or
B-20
<PAGE>
Class C shares acquired as a result of an exchange. The applicable sales charge
will be that imposed by the fund in which shares were initially purchased and
the purchase date will be deemed to be the first day of the month after the
initial purchase, rather than the date of the exchange.
Class B and Class C shares of the Fund may also be exchanged for Class B and
Class C shares of an eligible money market fund without imposition of any CDSC
at the time of exchange. Upon subsequent redemption from such money market fund
or after re-exchange into the Fund, such shares may be subject to the CDSC
calculated by excluding the time such shares were held in the money market fund.
In order to minimize the period of time in which shares are subject to a CDSC,
shares exchanged out of the money market fund will be exchanged on the basis of
their remaining holding periods, with the longest remaining holding periods
being transferred first. [In measuring the time period shares are held in a
money market fund and "tolled" for purposes of calculating the CDSC holding
period, exchanges are deemed to have been made on the last day of the month.]
Thus, if shares are exchanged into the Fund from a money market fund during the
month (and are held in the Fund at the end of month), the entire month will be
included in the CDSC holding period. Conversely, if shares are exchanged into a
money market fund prior to the last day of the month (and are held in the money
market fund on the last day of the month), the entire month will be excluded
from the CDSC holding period. For purposes of calculating the seven-year holding
period applicable to the Class B conversion feature, the time period during
which Class B shares were held in a money market fund will be excluded.
At any time after acquiring shares of other funds participating in the Class
B or Class C exchange privilege, a shareholder may again exchange those shares
(and any reinvested dividends and distributions) for Class B or Class C shares
of the Fund, respectively, without subjecting such shares to any CDSC. Shares of
any fund participating in the Class B or Class C exchange privilege that were
acquired through reinvestment of dividends or distributions may be exchanged for
Class B or Class C shares of other funds, respectively, without being subject to
any CDSC.
Additional details about the Exchange Privilege and prospectuses for each of
the Prudential Mutual Funds are available from the Fund's Transfer Agent,
Prudential Securities or Prusec. The Exchange Privilege may be modified,
terminated or suspended on sixty days' notice, and any fund, including the Fund,
or the Distributor, has the right to reject any exchange application relating to
such fund's shares.
DOLLAR COST AVERAGING
Dollar cost averaging is a method of accumulating shares by investing a
fixed amount of dollars in shares at set intervals. An investor buys more shares
when the price is low and fewer shares when the price is high. The average cost
per share is lower than it would be if a constant number of shares were bought
at set intervals.
Dollar cost averaging may be used, for example, to plan for retirement, to
save for a major expenditure, such as the purchase of a home, or to finance a
college education. The cost of a year's education at a four-year college today
averages around $14,000 at a private college and around $4,800 at a public
university. Assuming these costs increase at a rate of 7% a year, as has been
projected, for the freshman class of 2007, the cost of four years at a private
college could reach $163,000 and over $97,000 at a public university.(1)
The following chart shows how much you would need in monthly investments to
achieve specified lump sums to finance your investment goals.(2)
<TABLE>
<CAPTION>
PERIOD OF
MONTHLY INVESTMENTS: $100,000 $150,000 $200,000 $250,000
- ------------------------------------ -------- -------- -------- --------
<S> <C> <C> <C> <C>
25 Years............................ $ 110 $ 165 $ 220 $ 275
20 Years............................ 176 264 352 440
15 Years............................ 296 444 592 740
10 Years............................ 555 833 1,110 1,388
5 Years............................ 1,371 2,057 2,742 3,428
See "Automatic Savings Accumulation Plan."
<FN>
- ------------------------
(1) Source information concerning the costs of education at public
universities is available from The College Board Annual Survey of
Colleges, 1992. Information about the costs of private colleges is from
the Digest of Education Statistics, 1992; The National Center for
Educational Statistics; and the U.S. Department of Education. Average
costs for private institutions include tuition, fees, room and board.
</TABLE>
B-21
<PAGE>
<TABLE>
<S> <C>
(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.
</TABLE>
AUTOMATIC SAVINGS ACCUMULATION PLAN (ASAP)
Under ASAP, an investor may arrange to have a fixed amount automatically
invested in shares of the Fund monthly by authorizing his or her bank account or
Prudential Securities account (including a Command Account) to be debited to
invest specified dollar amounts in shares of the Fund. The investor's bank must
be a member of the Automatic Clearing House System. Share certificates are not
issued to ASAP participants.
Further information about this program and an application form can be
obtained from the Transfer Agent, Prudential Securities or Prusec.
SYSTEMATIC WITHDRAWAL PLAN
A systematic withdrawal plan is available to shareholders through Prudential
Securities or the Transfer Agent. Such withdrawal plan provides for monthly or
quarterly checks in any amount, except as provided below, up to the value of the
shares in the shareholder's account. Withdrawals of Class B or Class C shares
may be subject to a CDSC. See "Shareholder Guide-- How to Sell Your
Shares--Contingent Deferred Sales Charges--Class B Shares" in the Prospectus.
In the case of shares held through the Transfer Agent (i) a $10,000 minimum
account value applies, (ii) withdrawals may not be for less than $100 and (iii)
the shareholder must elect to have all dividends and/or distributions
automatically reinvested in additional full and fractional shares at net asset
value on shares held under this plan. See "Automatic Reinvestment of Dividends
and/or Distributions."
Prudential Securities and the Transfer Agent act as agents for the
shareholder in redeeming sufficient full and fractional shares to provide the
amount of the periodic withdrawal payment. The systematic withdrawal plan may be
terminated at any time, and the Distributor reserves the right to initiate a fee
of up to $5 per withdrawal, upon 30 days' written notice to the shareholder.
Withdrawal payments should not generally be considered as dividends, yield
or income. If periodic withdrawals continuously exceed reinvested dividends and
distributions, the shareholder's original investment will be correspondingly
reduced and ultimately exhausted.
Furthermore, each withdrawal constitutes a redemption of shares, and any
gain or loss realized must generally be recognized for federal income tax
purposes. In addition, withdrawals made concurrently with purchases of
additional shares are inadvisable because of the sales charge applicable to (i)
the purchase of Class A shares and (ii) the withdrawal of Class B and Class C
shares.
Each shareholder should consult his or her own tax adviser with regard to
the tax consequences of the plan, particularly if used in connection with a
retirement plan.
TAX-DEFERRED RETIREMENT PLANS
Various tax-deferred retirement plans, including a 401(k) Plan,
self-directed individual retirement accounts and "tax sheltered accounts" under
Section 403(b)(7) of the Internal Revenue Code are available through the
Distributor. These plans are for use by both self-employed individuals and
corporate employers. These plans permit either self-direction of accounts by
participants, or a pooled account arrangement. Information regarding the
establishment of these plans, the administration, custodial fees and other
details are available from the Transfer Agent or Prudential Securities.
Investors who are considering the adoption of such a plan should consult
with their own legal counsel or tax adviser with respect to the establishment
and maintenance of any such plan.
TAX-DEFERRED RETIREMENT ACCOUNTS
INDIVIDUAL RETIREMENT ACCOUNTS. An individual retirement account (IRA)
permits the deferral of federal income tax on income earned in the account until
the earnings are withdrawn. The following chart represents a comparison of the
earnings in a
B-22
<PAGE>
personal savings account with those in an IRA, assuming a $2,000 annual
contribution, an 8% rate of return and a 39.6% federal income tax bracket and
shows how much more retirement income can accumulate within an IRA as opposed to
a taxable individual savings account.
TAX-DEFERRED COMPOUNDING(1)
<TABLE>
<CAPTION>
CONTRIBUTIONS PERSONAL
MADE OVER: SAVINGS IRA
--------------- -------- --------
<S> <C> <C>
10 years $ 26,165 $ 31,291
15 years 44,675 58,649
20 years 68,109 98,846
25 years 97,780 157,909
30 years 135,346 244,692
<FN>
- ------------------------
(1) The chart is for illustrative purposes only and does not represent the
performance of the Fund or any specific investment. It shows taxable versus
tax-deferred compounding for the periods and on the terms indicated. Earnings
in the IRA account will be subject to tax when withdrawn from the account.
</TABLE>
NET ASSET VALUE
The net asset value per share is the net worth of the Fund (assets including
securities at value minus liabilities) divided by the number of shares
outstanding. Net asset value is calculated separately for each class. The
securities owned by the Fund are traded on national securities exchanges as well
as in the over-the-counter market. Currently, the value of portfolio securities,
including GNMA securities, is determined by reference to quotations received
from a pricing service as of 2:30 and 3:00 P.M., New York time. In addition to
market prices, the pricing service considers such factors as maturities, yields,
call features, and developments relating to specific securities in arriving at
valuations for normal institutional size trading units of securities.
Short-term securities which mature in more than 60 days are valued at
current market quotations. Short-term securities which mature in 60 days or less
are valued at amortized cost, 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 from date of purchase exceeded 60 days,
unless such valuation is determined not to represent fair value by the Board of
Directors.
Exchange-traded options on U.S. Government securities are valued at their
last sale price as of the close of options trading on the applicable exchanges,
which is currently 4:10 P.M., New York time. If there is no sale on the
applicable options exchange on a given day, options are valued at the average of
the quoted bid and asked prices as of the close of the applicable exchange.
Futures contracts are marked to market daily, and options thereon are valued at
their last sale price, as of the close of the applicable commodities exchanges,
which is currently 4:15 P.M., New York time. Securities or other assets for
which market quotations are not readily available (including OTC options) will
be valued at their fair value as determined in good faith by the Manager under
procedures established by the Fund's Board of Directors.
The Fund will compute its net asset value once daily at 4:15 P.M., New York
time, on each day the New York Stock Exchange is open for trading except on days
on which no orders to purchase, sell or redeem Fund shares have been received or
days on which changes in the value of the Fund's portfolio securities do not
affect the net asset value. The New York Stock Exchange is closed on the
following holidays: New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
In the event that the New York Stock Exchange or the national securities
exchanges on which stock options are traded adopt different trading hours on
either a permanent or temporary basis, the Board of Directors of the Fund will
reconsider the time at which net asset value is computed. In addition, the Fund
may compute its net asset value as of any time permitted pursuant to any
exemption, order or statement of the SEC or its staff.
The net asset value of Class B and Class C shares will generally be lower
than the net asset value of Class A shares as a result of the larger
distribution-related fee to which Class B and Class C shares are subject. It is
expected, however, that the net asset value per share of each class will tend to
converge immediately after the recording of dividends which will differ by
approximately the amount of the distribution-related expense accrual
differential among the classes.
B-23
<PAGE>
DIVIDENDS AND DISTRIBUTIONS
The Fund declares dividends daily based on actual net investment income
determined in accordance with generally accepted accounting principles. A
portion of such dividends may also include projected net investment income. Such
dividends will be payable monthly. The Fund expects to make distributions of net
capital gains, if any, at least annually. In determining the amount of capital
gains to be distributed, any capital loss carryforwards from prior years will be
offset against capital gains. For federal income tax purposes, the Fund has a
capital loss carryforward as of December 31, 1993 of approximately $11,324,000
of which $5,602,500 expires in 1996, $3,073,700 expires in 1997 and $2,647,800
expires in 1998. Accordingly, no capital gains distribution is expected to be
paid to shareholders until net capital gains have been realized in excess of
such carryforwards. Distributions will be paid in additional Fund shares based
on net asset value, unless the shareholder elects in writing not less than five
full business days prior to the record date to receive such distributions in
cash.
The per share dividends on Class B and Class C shares will be lower than the
per share dividends on Class A shares as a result of the higher
distribution-related fee applicable to the Class B and Class C shares. The per
share distributions of net capital gains, if any, will be paid in the same
amount to Class A, Class B and Class C shares. See "Net Asset Value."
TAXES
The Fund has elected to qualify and intends to remain qualified as a
regulated investment company under Subchapter M of the Internal Revenue Code of
1986, as amended. Under Subchapter M, the Fund is not subject to federal income
taxes on the taxable income it distributes to shareholders, provided it
distributes to shareholders each year at least 90% of its net investment income
and net short-term capital gains. In addition, Subchapter M permits net
long-term capital gains of the Fund (I.E., the excess of net long-term capital
gains over net short-term capital losses) to be treated as long-term capital
gains of the shareholders, regardless of how long shares in the Fund are held.
Qualification as a regulated investment company under the Internal Revenue
Code requires, among other things, that (a) at least 90% of the Fund's annual
gross income, be derived from interest, proceeds from loans of securities,
dividends and gains from the sale or other disposition of securities or foreign
currencies, or other income (including, but not limited to, gains from options,
futures or forward contracts) derived with respect to its business of investing
in such securities or currencies; (b) the Fund derives less than 30% of its
annual gross income from gains from the sale or other disposition of securities
or options thereon held for less than three months; and (c) the Fund diversify
its holdings so that, at the end of each fiscal quarter, (i) at least 50% of the
market value of the Fund's assets is represented by cash, U.S. Government
securities and other securities limited in respect of any one issuer to an
amount not greater than 5% of the market value of the Fund's assets and 10% of
the outstanding voting securities of such issuer, and (ii) not more than 25% of
the value of the Fund's assets is invested in the securities of any one issuer
(other than U.S. Government securities). The Fund generally will be subject to a
nondeductible excise tax of 4% to the extent that it does not meet certain
minimum distribution requirements as of the end of each calendar year. The Fund
intends to make timely distributions of the Fund's income in compliance with
these requirements. As a result, it is anticipated that the Fund will not be
subject to the excise tax.
The "straddle" provisions of the Internal Revenue Code may also affect the
taxation of the Fund's transactions in options on securities, and limit the
deductibility of any loss from the disposition of a position to the extent of
the unrealized gain on any offsetting position. Further, any position in the
straddle (E.G., a put option acquired by the Fund) may affect the holding period
of the offsetting position for purposes of the 30% of gross income test
described above, and accordingly the Fund's ability to enter into straddles and
dispose of the offsetting positions may be limited.
Any loss realized on a sale, redemption or exchange of shares of the Fund by
a shareholder will be disallowed to the extent the shares are replaced within a
61-day period (beginning 30 days before the disposition of shares). Shares
purchased pursuant to the reinvestment of a dividend will constitute a
replacement of shares.
A shareholder who acquires shares of the Fund and sells or otherwise
disposes of such shares within 90 days of acquisition may not be allowed to
include certain sales charges incurred in acquiring such shares for purposes of
calculating gain or loss realized upon a sale or exchange of shares of the Fund.
The Fund has obtained a written letter of determination from the
Pennsylvania Department of Revenue that, as a registered foreign corporation
"doing business" in Pennsylvania, the Fund is subject to the Pennsylvania
foreign franchise tax. Accordingly, it is believed that Fund shares are exempt
from Pennsylvania personal property taxes. The Fund anticipates that it will
continue such business activities but reserves the right to suspend them at any
time, resulting in the termination of the exemption.
B-24
<PAGE>
The Fund may be subject to state or local tax in certain other states where
it is deemed to be doing business. Further, in those states which have income
tax laws, the tax treatment of the Fund and of shareholders of the Fund with
respect to distributions by the Fund may differ from federal tax treatment.
Distributions to shareholders may be subject to additional state and local
taxes. Shareholders are urged to consult their own tax advisers regarding
specific questions as to federal, state or local taxes.
PERFORMANCE INFORMATION
YIELD. The Fund may from time to time advertise its yield as calculated over
a 30-day period. YIELD IS CALCULATED SEPARATELY FOR CLASS A, CLASS B AND CLASS C
SHARES. The yield will be computed by dividing the Fund's net investment income
per share earned during this 30-day period by the maximum offering price per
share on the last day of this period. Yield is calculated according to the
following formula:
a - b
YIELD = 2[( ----------- +1)to the power of 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 maximum offering price per share on the last day of the
period.
The Fund's 30-day yields for the 30 days ended December 31, 1993 for the
Fund's Class A and Class B shares were 3.33% and 2.89%, respectively. During
this period, no Class C shares were outstanding.
Yield fluctuates and an annualized yield quotation is not a representation
by the Fund as to what an investment in the Fund will actually yield for any
given period.
AVERAGE ANNUAL TOTAL RETURN. The Fund may also advertise its average annual
total return. Average annual total return is determined separately for Class A,
Class B and Class C shares. See "How the Fund Calculates Performance" in the
Prospectus.
Average annual total return is computed according to the following formula:
P(1+T)to the power of n = ERV
Where: P = a hypothetical initial payment of $1000.
T = average annual total return.
n = number of years.
ERV = ending redeemable value of a hypothetical $1000 payment made at
the beginning of the 1-, 5- or 10-year periods (or fractional
portion thereof).
Average annual total return takes into account any applicable initial or
contingent deferred sales charges but does not take into account any federal or
state income taxes that may be payable upon redemption.
The average annual total return with respect to the Class A shares for the
one year and three and three-and-eleven-twelfths year periods ended December 31,
1993 was 0.24% and 7.15%, respectively. During these periods, no Class C shares
were outstanding. The average annual total return for the Class B shares of the
Fund for the one-, five- and ten-year periods ended on December 31, 1993 was
(0.71%), 8.39% and 8.93%, respectively.
B-25
<PAGE>
AGGREGATE TOTAL RETURN. The Fund may also advertise its aggregate total
return. Aggregate total return is determined separately for Class A, Class B and
Class C shares. See "How the Fund Calculates Performance" in the Prospectus.
Aggregate total return represents the cumulative change in the value of an
investment in the Fund and is computed by the following formula:
<TABLE>
<S> <C>
ERV - P = T
-------
P
</TABLE>
Where: P = a hypothetical initial payment of $1000.
T = aggregate total return
ERV = ending redeemable value of a hypothetical $1000 payment made at
the beginning of the 1-, 5- or 10-year periods (or fractional
portion thereof).
Aggregate total return does not take into account any federal or state
income taxes that may be payable upon redemption or any applicable initial or
contingent deferred sales charges.
The Fund's aggregate total return for Class A shares for the one year and
three and three-and-eleven-twelfths year periods ended on December 31, 1993 was
4.97% and 37.47%, respectively. The aggregate total return for Class B shares
for the one-, five- and ten-year periods ended on December 31, 1993 was 4.29%,
50.63% and 135.37% respectively. During these periods, no Class C shares were
outstanding.
From time to time, the performance of the Fund may be measured against
various indices. Set forth below is a chart which compares the performance of
different types of investments over the long-term and the rate of inflation.(1)
[GRAPHIC]
(1)Source: Ibbotson Associates, "Stocks, Bonds, Bills and Inflation--1993
Yearbook," (annually updates the work of Roger G. Ibbotson and Rex A.
Sinquefield). Common stock returns are based on the Standard & Poor's 500 Stock
Index, a market-weighted, unmanaged index of 500 common stocks in a variety of
industry sectors. It is a commonly used indicator of broad stock price
movements. This chart is for illustrative purposes only, and is not intended to
represent the performance of any particular investment or fund.
B-26
<PAGE>
CUSTODIAN, TRANSFER AND DIVIDEND DISBURSING AGENT
AND INDEPENDENT ACCOUNTANTS
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, serves as Custodian for the Fund's portfolio securities and
cash and in that capacity maintains certain financial and accounting books and
records pursuant to an agreement with the Fund. See "How the Fund is
Managed--Custodian and Transfer and Dividend Disbursing Agent" in the Propectus.
Prudential Mutual Fund Services, Inc. (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 PMF. PMFS provides customary transfer
agency services to the Fund, including the handling of shareholder
communications, the processing of shareholder transactions, the maintenance of
shareholder account records, the payment of dividends and distributions, and
related functions. For these services, PMFS receives an annual fee per
shareholder account, a new account set-up fee for each manually established
account and a monthly inactive zero balance account fee per shareholder account.
PMFS is also reimbursed for its out-of-pocket expenses, including, but not
limited to, postage, stationery, printing, allocable communications expenses and
other costs. For the fiscal year ended December 31, 1993, the Fund incurred fees
of $409,900 for the services of PMFS.
Price Waterhouse, 1177 Avenue of the Americas, New York, New York 10036
serves as the Fund's independent accountants and in that capacity audits the
Fund's annual financial statements.
B-27
<PAGE>
PRUDENTIAL GNMA FUND PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1993
<TABLE>
<CAPTION>
Principal Description Value
Amount (Note 1)
(000)
--------- ----------- --------
<C> <S> <C>
LONG-TERM INVESTMENTS - 92.7%
U.S. GOVERNMENT AGENCY MORTGAGE
PASS-THROUGH OBLIGATIONS - 90.2%
Federal National Mortgage Association,
$ 5,022 6.00%, 12/1/99 - 11/25/00 . . . . . . . $ 5,072,372
24,214 7.00%, 10/25/23 . . . . . . . . . . . . 24,562,024
18,500 11.00%, 6/1/23. . . . . . . . . . . . . 20,766,250
Government National Mortgage
Association,
35,000+ 5.50%, 6/15/23. . . . . . . . . . . . . 35,989,853
50,000+ 6.50%, 6/15/23. . . . . . . . . . . . . 49,531,000
9,000 7.00%, 11/15/23 . . . . . . . . . . . . 9,143,370
50,000+ 7.50%, 6/15/23. . . . . . . . . . . . . 51,828,000
25,000+ 8.00%, 6/15/23. . . . . . . . . . . . . 26,320,215
31 8.50%, 9/15/21. . . . . . . . . . . . . 32,791
50,697 9.50%, 3/15/16 - 3/15/19. . . . . . . . 54,879,058
3,496 11.00%, 3/15/10 - 7/15/20 . . . . . . . 3,977,614
12,282 11.50%, 3/15/10 - 8/15/18 . . . . . . . 14,124,108
1,354 12.00%, 12/15/12 - 6/15/15. . . . . . . 1,567,600
----------
Total U.S. Government Agency
Mortgage Pass-Through
Obligations
(cost $297,831,058) . . . . . . . . . . 297,794,255
-----------
COLLATERALIZED MORTGAGE OBLIGATION - 2.5%
Greenwich Capital Acceptance, Inc.,
125,000 2.25%, 1/25/24, ARM/IO
(cost $8,916,482) . . . . . . . . . . . 8,281,250
-----------
Total long-term investments
(cost $306,747,540) . . . . . . . . . . 306,075,505
-----------
SHORT-TERM INVESTMENTS - 64.5%
COMMERCIAL PAPER - 54.2%
Associates Corp. of North America,
16,581 3.37%, 1/10/94. . . . . . . . . . . . . 16,567,030
Bankers Trust Corp.,
15,000 3.35%, 1/10/94. . . . . . . . . . . . . 14,987,437
Ciesco, Inc.,
15,000 3.35%, 1/10/94. . . . . . . . . . . . . 14,987,437
Falcon Asset Securitization Corp.,
16,581 3.42%, 1/12/94. . . . . . . . . . . . . 16,563,673
General Electric Capital Corp.,
16,685 3.18%, 1/14/94. . . . . . . . . . . . . 16,665,840
Household Finance Corp.,
16,581 3.40%, 1/10/94. . . . . . . . . . . . . 16,566,906
John Hancock Capital Corp.,
15,735 3.35%, 1/3/94 . . . . . . . . . . . . . 15,732,072
Paccar Financial Corp.,
5,000 3.19%, 1/7/94 . . . . . . . . . . . . . 4,997,341
Sonoco Products Co.,
4,000 3.40%, 1/4/94 . . . . . . . . . . . . . 3,998,867
Transamerica Financial Corp.,
13,000 3.19%, 1/10/94. . . . . . . . . . . . . 12,989,633
11,755 3.40%, 1/7/94 . . . . . . . . . . . . . 11,748,339
UBS Finance Delaware, Inc.,
16,600 3.18%, 1/14/94. . . . . . . . . . . . . 16,580,938
United States Leasing International,
10,638 3.20%, 1/14/94. . . . . . . . . . . . . 10,625,707
5,943 3.35%, 1/10/94. . . . . . . . . . . . . 5,938,023
-----------
Total Commercial Paper
(cost $178,949,243) . . . . . . . . . . 178,949,243
-----------
REPURCHASE AGREEMENT - 10.3%
Joint Repurchase Agreement
Account,
34,178 3.15%, 1/3/94 (Note 5)
(cost $34,178,000). . . . . . . . . . . 34,178,000
-----------
Total short-term investments
(cost $213,127,243) . . . . . . . . . . 213,127,243
-----------
</TABLE>
See Notes to Financial Statements.
B-28
<PAGE>
PRUDENTIAL GNMA FUND
<TABLE>
<CAPTION>
Principal Description Value
Amount (Note 1)
(000)
--------- ----------- --------
<C> <S> <C>
TOTAL INVESTMENTS - 157.2%
(cost $519,874,783; Note 4) . . . . . . $519,202,748
Liabilities in excess of other
assets - (57.2%). . . . . . . . . . . . (188,939,379)
------------
NET ASSETS - 100%. . . . . . . . . . . . . $330,263,369
------------
------------
<FN>
- ------------------------------
ARM/IO - Adjustable Rate Mortgage - Interest Only.
+Indicates a delayed-delivery security.
</TABLE>
The industry classification breakdown shown as percentages of net assets for
the commercial paper held as of December 31, 1993 was as follows:
<TABLE>
<S> <C>
Personal Credit Institutions . . . . . . . . . . . . . 17.5%
Asset-Backed Securities. . . . . . . . . . . . . . . . 9.6
Short-Term Business Credit . . . . . . . . . . . . . . 6.6
Commercial Banks . . . . . . . . . . . . . . . . . . . 5.0
Computer Rental & Leasing. . . . . . . . . . . . . . . 5.0
Life Insurance . . . . . . . . . . . . . . . . . . . . 4.8
Bank Holding Companies . . . . . . . . . . . . . . . . 4.5
Paperboard Mills . . . . . . . . . . . . . . . . . . . 1.2
----
54.2%
----
----
</TABLE>
See Notes to Financial Statements.
B-29
<PAGE>
PRUDENTIAL GNMA FUND
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
DECEMBER 31,
1993
------------
<S> <C>
ASSETS
Investments, at value (cost $519,874,783). . . . . . . $519,202,748
Cash . . . . . . . . . . . . . . . . . . . . . . . . . 19,564
Receivable for investments sold. . . . . . . . . . . . 4,431,472
Interest receivable. . . . . . . . . . . . . . . . . . 956,496
Receivable for Fund shares sold. . . . . . . . . . . . 923,775
Deferred expenses and other assets . . . . . . . . . . 8,603
------------
Total assets. . . . . . . . . . . . . . . . . . . 525,542,658
------------
LIABILITIES
Payable for investments purchased. . . . . . . . . . . 193,720,477
Payable for Fund shares reacquired . . . . . . . . . . 916,946
Accrued expenses . . . . . . . . . . . . . . . . . . . 240,183
Due to Distributors. . . . . . . . . . . . . . . . . . 206,348
Due to Manager . . . . . . . . . . . . . . . . . . . . 141,261
Dividends payable. . . . . . . . . . . . . . . . . . . 54,074
------------
Total liabilities . . . . . . . . . . . . . . . . 195,279,289
------------
NET ASSETS . . . . . . . . . . . . . . . . . . . . . . $330,263,369
------------
------------
Net assets were comprised of:
Common stock, at par . . . . . . . . . . . . . . . . $ 224,533
Paid-in capital in excess of par . . . . . . . . . . 340,993,821
------------
341,218,354
Undistributed net investment income. . . . . . . . . . 1,041,122
Accumulated net realized loss on investments . . . . . (11,324,072)
Net unrealized depreciation on investments . . . . . . (672,035)
------------
Net assets, December 31, 1993. . . . . . . . . . . . . $330,263,369
------------
------------
Class A:
Net asset value and redemption price per share
($10,862,748 divided by 736,618 shares of common
stock issued and outstanding) . . . . . . . . . . $14.75
Maximum sales charge (4.5% of offering price). . . . . .69
------
Maximum offering price to public . . . . . . . . . . . $15.44
------
------
Class B:
Net asset value, offering price and redemption
price per share ($319,400,621 divided by 21,716,727
shares of common stock issued and outstanding). . . $14.71
------
------
</TABLE>
See Notes to Financial Statements.
B-30
<PAGE>
PRUDENTIAL GNMA FUND
Statement of Operations
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,1993
----------------
<S> <C>
INVESTMENT INCOME
Income
Interest. . . . . . . . . . . . . . . . . . . . . $25,452,568
-----------
Expenses
Distribution fee--Class A . . . . . . . . . . . . 15,299
Distribution fee--Class B . . . . . . . . . . . . 2,495,486
Management fee. . . . . . . . . . . . . . . . . . 1,714,652
Transfer agent's fees and expenses. . . . . . . . 587,000
Custodian's fees and expenses . . . . . . . . . . 317,000
Registration fees . . . . . . . . . . . . . . . . 65,000
Reports to shareholders . . . . . . . . . . . . . 51,000
Audit fee . . . . . . . . . . . . . . . . . . . . 50,000
Franchise taxes . . . . . . . . . . . . . . . . . 50,000
Directors' fees . . . . . . . . . . . . . . . . . 45,000
Legal fees. . . . . . . . . . . . . . . . . . . . 23,000
Miscellaneous . . . . . . . . . . . . . . . . . . 15,244
-----------
Total expenses. . . . . . . . . . . . . . . . . 5,428,681
Net investment income. . . . . . . . . . . . . . . . . 20,023,887
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain on investment transactions . . . . . 3,445,442
Net change in unrealized appreciation/depreciation
of investments. . . . . . . . . . . . . . . . . . (9,007,572)
-----------
Net loss on investments. . . . . . . . . . . . . . . . (5,562,130)
-----------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS. . . . . . . . . . . . . . . $14,461,757
-----------
-----------
See Notes to Financial Statements.
</TABLE>
PRUDENTIAL GNMA FUND
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
INCREASE (DECREASE) IN NET --------------------------
ASSETS 1993 1992
------------ -----------
<S> <C> <C>
Operations
Net investment income . . . . . . . . . . . . . $20,023,887 $20,141,176
Net realized gain on
investments . . . . . . . . . . . . . . . . . 3,445,442 1,322,775
Net change in unrealized
appreciation/depreciation of investments. . . (9,007,572) (4,131,439)
----------- -----------
Net increase in net assets
resulting from operations . . . . . . . . . . 14,461,757 17,332,512
----------- -----------
Dividends and distributions (Note 1)
Dividends to shareholders
from net investment income
Class A . . . . . . . . . . . . . . . . . . . . (646,676) (474,172)
Class B . . . . . . . . . . . . . . . . . . . . (19,377,211) (19,667,004)
------------ -----------
(20,023,887) (20,141,176)
------------ -----------
Dividends to shareholders
in excess of net investment income
Class A . . . . . . . . . . . . . . . . . . . . (66,983) (33,981)
Class B . . . . . . . . . . . . . . . . . . . . (2,007,109) (1,409,434)
------------ -----------
(2,074,092) (1,443,415)
------------ -----------
Fund share transactions (Note 6)
Proceeds from shares sold . . . . . . . . . . . 67,747,553 111,084,170
Net asset value of shares issued
in reinvestment of dividends
and distributions. . . . . . . . . . . . . . . 13,613,736 13,509,145
Cost of shares reacquired . . . . . . . . . . . (78,475,417) (64,257,029)
------------ -----------
Net increase in net assets from
Fund share transactions . . . . . . . . . . . . 2,885,872 60,336,286
------------ -----------
Total increase (decrease). . . . . . . . . . . . . . (4,750,350) 56,084,207
NET ASSETS
Beginning of year. . . . . . . . . . . . . . . . . . 335,013,719 278,929,512
------------ -----------
End of year. . . . . . . . . . . . . . . . . . . . . $330,263,369 $335,013,719
------------ -----------
------------ -----------
</TABLE>
See Notes to Financial Statements.
B-31
<PAGE>
PRUDENTIAL GNMA FUND
Notes to Financial Statements
Prudential-Bache GNMA Fund, Inc., doing business as Prudential GNMA Fund
(the "Fund"), is registered under the Investment Company Act of 1940 as a
diversified, open-end management investment company. The investment objective of
the Fund is to achieve a high level of income over the long-term consistent with
providing reasonable safety by investing primarily in mortgage-backed securities
guaranteed as to timely payment of principal and interest by the Government
National Mortgage Association (GNMA) and other readily marketable fixed-income
securities. The ability of issuers of debt securities, other than those issued
or guaranteed by the U.S. Government, held by the Fund to meet their obligations
may be affected by economic developments in a specific industry or region.
NOTE 1. ACCOUNTING POLICIES The following is a summary of significant accounting
policies followed by the Fund in the preparation of its financial statements.
SECURITY VALUATION: The Fund values portfolio securities on the basis of prices
provided by dealers or by a pricing service which uses information such as
market values, maturities, yields, call features and developments relating to
specific securities in determining values.
Short-term securities which mature in more than 60 days are valued at
current market quotations. Short-term securities which mature in 60 days or less
are valued at amortized cost which approximates market value.
In connection with transactions in repurchase agreements with U.S.
financial institutions, it is the Fund's policy that its custodian takes
possession of the underlying collateral securities, the value of which exceeds
the principal amount of the repurchase transaction, including accrued interest.
If the seller defaults and the value of the collateral declines or if bankruptcy
proceedings are commenced with respect to the seller of the security,
realization of the collateral by the Fund may be delayed or limited.
SECURITIES TRANSACTIONS AND INVESTMENT INCOME: Securities transactions are
recorded on the trade date. Since certain mortgage-backed securities, such as
GNMAs, only settle on one day each month, there can be occasions when, pending
settlement, there may be substantial short-term securities in the portfolio
available to fund the purchases of these mortgage-backed securities. Realized
gains and losses on sales of investments are calculated on the identified cost
basis. Interest income is recorded on the accrual basis. The Fund amortizes
original issue discount paid on purchases of portfolio securities as adjustments
to interest income.
Net investment income (other than distribution fees) and unrealized and
realized gains or losses are allocated daily to each class of shares based upon
the relative proportion of net assets of each class at the beginning of the day.
DOLLAR ROLLS: The Fund enters into mortgage dollar rolls in which the Fund sells
mortgage securities for delivery in the current month, realizing a gain or loss,
and simultaneously contracts to repurchase somewhat similar (same type, coupon
and maturity) securities on a specified future date. During the roll period the
Fund forgoes principal and interest paid on the securities. The Fund is
compensated by the interest earned on the cash proceeds of the initial sale and
by the lower repurchase price at the future date. The difference between the
sale proceeds and the lower repurchase price is taken into income. The Fund
maintains a segregated account, the dollar value of which is equal to its
obligations, in respect of dollar rolls.
FEDERAL INCOME TAXES: It is the Fund's policy to continue to meet the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute all of its taxable net income and net capital gains,
if any, to its shareholders. Therefore, no federal income tax provision is
required.
EQUALIZATION: The Fund follows the accounting practice known as equalization by
which a portion of the proceeds from sales and costs of reacquisitions of Fund
shares, equivalent on a per share basis to the amount of distributable net
investment income on the date of the transaction, is credited or charged to
undistributed net investment income. As a result, undistributed net investment
income per share is unaffected by sales or reacquisitions of the Fund's shares.
DIVIDENDS AND DISTRIBUTIONS: Dividends from net investment income are declared
daily and paid monthly. The Fund will distribute at least annually any net
capital gains in excess of loss carryforwards. Dividends and distributions are
recorded on the ex-dividend date.
Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles.
RECLASSIFICATION OF CAPITAL ACCOUNTS: Effective January 1, 1993, the Fund began
accounting and reporting for distributions to shareholders in accordance with
Statement of Position 93-2: Determination, Disclosure, and Financial
B-32
<PAGE>
Statement Presentation of Income, Capital Gain, and Return of Capital
Distributions by Investment Companies. As a result of this statement, the Fund
changed the classification of distributions to shareholders to better disclose
the differences between financial statement amounts and distributions determined
in accordance with income tax regulations. The effect caused by adopting this
statement was to decrease paid-in capital by $1,931,563, increase undistributed
net investment income by $1,034,987 and decrease accumulated net realized loss
on investments by $896,576 compared to amounts previously reported through
December 31, 1992. During the year ended December 31, 1993, the Fund reclassed
$2,067,957 of dividends in excess of net investment income to paid-in capital
from undistributed net investment income. Net investment income, net realized
gains and net assets were not affected by this change.
NOTE 2. AGREEMENTS The Fund has a management agreement with Prudential Mutual
Fund Management, Inc. ("PMF"). Pursuant to this agreement, PMF has
responsibility for all investment advisory services and supervises the
subadviser's performance of such services. PMF has entered into a subadvisory
agreement with The Prudential Investment Corporation ("PIC"); PIC furnishes
investment advisory services in connection with the management of the Fund. PMF
pays for the cost of the subadviser's services, the compensation of officers of
the Fund, occupancy and certain clerical and bookkeeping costs of the Fund. The
Fund bears all other costs and expenses.
The management fee paid PMF is computed daily and payable monthly, at an
annual rate of .50 of 1% of the Fund's average daily net assets.
The Fund has distribution agreements with Prudential Mutual Fund
Distributors, Inc. ("PMFD"), which acts as the distributor of the Class A
shares of the Fund, and with Prudential Securities Incorporated ("PSI"), which
acts as distributor of the Class B shares of the Fund (collectively the
"Distributors"). To reimburse the Distributors for their expenses incurred in
distributing the Fund's Class A and Class B shares, the Fund, pursuant to plans
of distribution, pays the Distributors a reimbursement accrued daily and payable
monthly.
Pursuant to the Class A Plan, the Fund reimburses PMFD for its expenses
with respect to Class A shares at an annual rate of up to .30 of 1% of the
average daily net assets of the Class A shares. Such expenses under the Class A
Plan were .15 of 1% of the average daily net assets of the Class A shares for
the year ended December 31, 1993. PMFD pays various broker-dealers, including
PSI and Pruco Securities Corporation ("Prusec"), affiliated broker-dealers,
for account servicing fees and other expenses incurred by such broker-dealers.
Pursuant to the Class B Plan, the Fund reimburses PSI for its
distribution-related expenses with respect to Class B shares at an annual rate
of up to .75 of 1% of the average daily net assets of the Class B shares.
The Class B distribution expenses include commission credits for payments
of commissions and account servicing fees to financial advisers and an
allocation for overhead and other distribution-related expenses, interest and/or
carrying charges, the cost of printing and mailing prospectuses to potential
investors and of advertising incurred in connection with the distribution of
shares.
The Distributors recover the distribution expenses and service fees
incurred through the receipt of reimbursement payments from the Fund under the
plans and the receipt of initial sales charges (Class A only) and contingent
deferred sales charges (Class B only) from shareholders.
PMFD has advised the Fund that it has received approximately
$131,000 in front-end sales charges resulting from sales of Class A shares
during the year ended December 31, 1993. From these fees, PMFD paid such sales
charges to dealers (PSI and Prusec) which in turn paid commissions to
salespersons.
With respect to the Class B Plan, at any given time, the amount of expenses
incurred by PSI in distributing the Fund's shares and not recovered through the
imposition of contingent deferred sales charges in connection with certain
redemptions of shares may exceed the total reimbursement made by the Fund
pursuant to the Class B Plan. PSI advised the Fund that for the year ended
December 31, 1993, it received approximately $504,000 in contingent deferred
sales charges imposed upon certain redemptions by investors. PSI, as
distributor, has also advised the Fund that at December 31, 1993, the amount of
distribution expenses incurred by PSI and not yet reimbursed by the Fund or
recovered through contingent deferred sales charges approximated $11,763,000.
This amount may be recovered through future payments under the Class B plan or
contingent deferred sales charges.
In the event of termination or noncontinuation of the Class B Plan, the
Fund would not be contractually obligated to pay PSI, as distributor, for any
expenses not previously reimbursed or recovered through contingent deferred
sales charges.
PMFD is a wholly-owned subsidiary of PMF; PSI, PMF and PIC are indirect,
wholly-owned subsidiaries of The Prudential Insurance Company of America.
B-33
<PAGE>
NOTE 3. OTHER TRANSACTIONS WITH AFFILIATES Prudential Mutual Fund Services, Inc.
("PMFS"), a wholly-owned subsidiary of PMF, serves as the Fund's transfer
agent and during the year ended December 31, 1993, the Fund incurred fees of
approximately $409,900 for the services of PMFS. As of December 31, 1993,
approximately $33,100 of such fees were due to PMFS. Transfer agent fees and
expenses in the Statement of Operations include certain out-of-pocket expenses
paid to non-affiliates.
NOTE 4. PORTFOLIO SECURITIES Purchases and sales of investment securities, other
than short-term investments and dollar rolls, for the year ended December 31,
1993 aggregated $528,536,800 and $443,302,625, respectively.
The cost basis of investments for federal income tax purposes is
substantially the same as the basis for financial reporting purposes and,
accordingly, as of December 31, 1993 net unrealized depreciation of investments
for federal income tax purposes was $672,035 (gross unrealized appreciation--
$453,570; gross unrealized depreciation--$1,125,605).
The Fund had a capital loss carryforward as of December 31, 1993 of
approximately $11,324,000 of which $5,602,500 expires in 1996, $3,073,700
expires in 1997 and $2,647,800 expires in 1998. Such carryforward is after
utilization of approximately $3,445,500 to offset the Fund's net taxable gains
realized and recognized in the year ended December 31, 1993. No capital gains
distribution is expected to be paid to shareholders until net gains have been
realized in excess of such carryforward.
NOTE 5. JOINT REPURCHASE AGREEMENT ACCOUNT The Fund, along with other affiliated
registered investment companies, transfers uninvested cash balances into a
single joint account, the daily aggregate balance of which is invested in one or
more repurchase agreements collateralized by U.S. Treasury or Federal agency
obligations. As of December 31, 1993, the Fund has a 2.86% undivided interest in
the joint account. The undivided interest for the Fund represents $34,178,000 in
the principal amount. As of such date, each repurchase agreement in the joint
account and the collateral therefor were as follows:
Bear, Stearns & Co. Inc., 3.18%, in the principal amount of $323,000,000,
repurchase price $323,085,595, due 1/3/94; collateralized by $200,000,000 U.S.
Treasury Notes, 3.875%, due 3/31/95, $5,745,000 U.S. Treasury Notes, 4.25% due,
7/31/95, $85,000 U.S. Treasury Notes, 7.375%, due 5/15/96, $30,000,000 U.S.
Treasury Notes, 5.625%, due 1/31/98 and $80,030,000 U.S. Treasury Notes, 7.50%,
due 11/15/01; approximate aggregate value including accrued interest--
$329,564,341.
Kidder, Peabody & Co. Inc., 3.20%, in the principal amount of $375,000,000,
repurchase price $375,100,000, due 1/3/94; collateralized by $200,000,000 U.S.
Treasury Bonds, 11.625%, due 11/15/04, $38,000,000 U.S. Treasury Bonds, 12.75%,
due 11/15/10, $11,730,000 U.S. Treasury Notes, 7.25%, due 11/15/96, $90,000 U.S.
Treasury Bonds, 9.00%, due 2/15/94 and $15,000,000 U.S. Treasury Notes, 7.375%,
due 5/15/96; approximate aggregate value including accrued interest--
$382,608,562.
Goldman, Sachs & Co., 3.10%, in the principal amount of $399,000,000,
repurchase price $399,103,075, due 1/3/94; collateralized by $363,720,000 U.S.
Treasury Bonds, 7.50%, due 11/15/16; approximate value including accrued
interest--$408,104,889.
Barclays de Zoete Wedd, Inc., 3.10%, in the principal amount of
$100,000,000, repurchase price $100,025,883, due 1/3/94; collateralized by
$32,000,000 U.S. Treasury Notes, 7.50%, due 11/15/01, $7,305,000 U.S. Treasury
Notes, 8.50%, due 2/15/00 and $49,000,000 U.S. Treasury Notes, 8.875%, due
11/15/98; approximate aggregate value including accrued interest--$102,043,014.
NOTE 6. CAPITAL The Fund offers both Class A and Class B shares. Class A shares
are sold with a front-end sales charge of up to 4.5%. Class B shares are sold
with a contingent deferred sales charge which declines from 5% to zero depending
on the period of time the shares are held. Both classes of shares have equal
rights as to earnings, assets and voting privileges except that each class bears
different distribution expenses and has exclusive voting rights with respect to
its distribution plan. There are 500 million shares of common stock, $.01 par
value per share, divided into two classes, designated Class A and Class B common
stock, each of which consists of 250 million authorized shares.
B-34
<PAGE>
Transactions in shares of common stock were as follows:
<TABLE>
<CAPTION>
Class A SHARES AMOUNT
- ------- -------- ----------
<S> <C> <C>
Year ended December 31, 1993:
Shares sold. . . . . . . . . . . . . . . . . . . . . 324,094 $4,896,635
Shares issued in reinvestment of dividends
and distributions . . . . . . . . . . . . . . . 24,707 372,441
Shares reacquired. . . . . . . . . . . . . . . . . . (212,210) (3,195,829)
-------- ----------
Net increase in shares outstanding . . . . . . . . . 136,591 $2,073,247
-------- ----------
-------- ----------
Year ended December 31, 1992:
Shares sold. . . . . . . . . . . . . . . . . . . . . 447,396 $6,752,448
Shares issued in reinvestment of
dividends and distributions . . . . . . . . . . 16,374 246,638
Shares reacquired. . . . . . . . . . . . . . . . . . (273,385) (4,137,123)
Net increase in shares outstanding . . . . . . . . . 190,385 $2,861,963
-------- ----------
-------- ----------
</TABLE>
<TABLE>
<CAPTION>
Class B SHARES AMOUNT
- ------- ---------- ------------
<S> <C> <C>
Year ended December 31, 1993:
Shares sold. . . . . . . . . . . . . . . . . . . . . 4,168,502 $ 62,850,918
Shares issued in reinvestment of
dividends and distributions . . . . . . . . . . . . 880,221 13,241,295
Shares reacquired. . . . . . . . . . . . . . . . . . (5,009,649) (75,279,588)
---------- -----------
Net increase in shares
outstanding . . . . . . . . . . . . . . . . . . 39,074 $ 812,625
---------- -----------
---------- -----------
Year ended December 31, 1992:
Shares sold. . . . . . . . . . . . . . . . . . . . . 6,932,240 $104,331,722
Shares issued in reinvestment of
dividends and distributions . . . . . . . . . . 883,250 13,262,507
Shares reacquired. . . . . . . . . . . . . . . . . . (3,997,465) (60,119,906)
---------- ------------
Net increase in shares outstanding . . . . . . . . . 3,818,025 $ 57,474,323
---------- ------------
---------- ------------
</TABLE>
B-35
<PAGE>
PRUDENTIAL GNMA FUND
Financial Highlights
<TABLE>
<CAPTION>
CLASS A CLASS B
----------------------------------------- ---------------------------------------------------
JANUARY 22,
1990*
THROUGH
YEAR ENDED DECEMBER 31, DECEMBER 31, YEAR ENDED DECEMBER 31,
--------------------------- ---------------------------------------------------
1993 1992 1991 1990 1993 1992 1991 1990 1989
------- ------ ------- ------- ------- --------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
period . . . . . . . . . . . . . $ 15.07 $15.30 $14.84 $14.75 $ 15.04 $ 15.27 $ 14.81 $ 14.86 $ 14.29
------- ------ ------ ------ -------- -------- -------- -------- --------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income. . . . . . . .95 1.10 1.14 1.17 .87 1.02 1.06 1.15 1.19
Net realized and unrealized gain
(loss) on investment
transactions . . . . . . . . . . (.21) (.15) .61 .13 (.23) (.16) .60 (.01) .59
------- ------ ----- ----- -------- -------- ------- ------- -------
Total from investment
operations . . . . . . . . . . .74 .95 1.75 1.30 .64 .86 1.66 1.14 1.78
------- ------ ----- ----- -------- -------- ------- ------- -------
LESS DISTRIBUTIONS
Dividends to shareholders from
net investment income . . . . . (.95) (1.10) (1.14) (1.17) (.87) (1.02) (1.06) (1.15) (1.19)
Dividends to shareholders in
excess of net investment
income . . . . . . . . . . . . . (.11) (.08) (.15) (.04) (.10) (.07) (.14) (.04) (.02)
------- ------ ----- ----- -------- -------- ------- ------- -------
Total distributions. . . . . . . (1.06) (1.18) (1.29) (1.21) (.97) (1.09) (1.20) (1.19) (1.21)
------- ------ ----- ----- -------- -------- ------- ------- -------
Net asset value, end of period . . $ 14.75 $15.07 $15.30 $14.84 $ 14.71 $ 15.04 $ 15.27 $ 14.81 $ 14.86
------- ------ ----- ----- -------- -------- ------- ------- -------
------- ------ ----- ----- -------- -------- ------- ------- -------
TOTAL RETURN@: . . . . . . . . . . 4.97% 6.42% 12.48% 9.27% 4.29% 5.80% 11.82% 8.10% 12.93%
RATIOS TO AVERAGE NET ASSETS:
Net assets, end of period (000). . $10,863 $9,045 $6,268 $1,604 $319,401 $325,969 $272,661 $226,605 $221,938
Average net assets (000) . . . . . $10,199 $6,651 $3,035 $756 $332,731 $295,255 $243,749 $218,749 $223,251
Ratios to average net assets:
Expenses, including
distribution fees . . . . . . 1.00% 1.00% 1.11% 1.15%+ 1.60% 1.60% 1.71% 1.74% 1.56%
Expenses, excluding
distribution fees . . . . . . .85% .85% .96% .99%+ .85% .85% .96% .99% .98%
Net investment income . . . . 6.42% 7.26% 7.81% 9.16%+ 5.82% 6.66% 7.21% 7.96% 8.16%
Portfolio turnover . . . . . . . . 134% 33% 118% 481% 134% 33% 118% 481% 200%
<FN>
- -----------------
*Commencement of offering of Class A shares.
+Annualized.
@Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
</TABLE>
See Notes to FInancial Statements
B-36
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors of
Prudential GNMA Fund
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Prudential GNMA Fund (the "Fund")
at December 31, 1993, and the results of its operations for the year then ended,
the changes in its net assets for each of the two years in the period then ended
and the financial highlights for each of the five years in the period then
ended, in conformity with generally accepted accounting principles. These
financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at
December 31, 1993 by correspondence with the custodian and brokers, and the
application of alternative auditing procedures where confirmations from brokers
were not received, provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE
1177 Avenue of the Americas
New York, New York
February 9, 1994
TAX INFORMATION
We are required by Massachusetts and Oregon to inform you that dividends
which have been derived from interest on federal obligations are not taxable to
shareholders. Please be advised that 10.69% of the dividends paid by the Fund
qualify for each of these states' tax exclusion.
We wish to advise you that the corporate dividends received deduction for
the Fund is zero. Only funds that invest in U.S. equity securities are entitled
to pass-through a corporate dividends received deduction.
B-37
<PAGE>
APPENDIX A
DESCRIPTION OF CORPORATE BOND RATINGS
MOODY'S INVESTORS SERVICE, INC.'S CORPORATE BOND RATINGS:
Aaa--Bonds which are rated Aaa are judged to be the best quality. They carry
the smallest degree of investment risk and are generally referred to as
"gilt-edge." Interest payments are protected by a large or by an exceptionally
stable margin, and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa--Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A--Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Moody's applies numerical modifiers 1, 2 and 3 in the Aa and A rating
categories. The modifier 1 indicates that the security ranks at a higher end of
the rating category, the modifier 2 indicates a mid-range rating and the
modifier 3 indicates that the issue ranks at the lower end of the rating
category.
STANDARD & POOR'S CORPORATION'S CORPORATE BOND RATINGS:
AAA--Bonds rated AAA have the highest rating assigned by Standard & Poor's
to a debt obligation and indicate an extremely strong capacity to pay interest
and repay principal.
AA--Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the highest rate issues only to a small degree.
A--Bonds rated A have a strong capacity to pay interest and repay principal
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than bonds in higher rated categories.
A-1
<PAGE>
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(A) FINANCIAL STATEMENTS:
(1) Financial Statements included in the Prospectus constituting Part A
of this Registration Statement:
Financial Highlights.
(2) Financial statements included in the Statement of Additional
Information constituting Part B of this Registration Statement:
Portfolio of Investments at December 31, 1993.
Statement of Assets and Liabilities at December 31, 1993.
Statement of Operations for the year ended December 31, 1993.
Statement of Changes in Net Assets for the years ended December 31,
1993 and 1992.
Notes to Financial Statements.
Financial Highlights.
Report of Independent Accountants.
(B) EXHIBITS:
1. (a) Articles of Incorporation, as amended, incorporated by reference
to Exhibit 1 to Post-Effective Amendment No. 6 to the Registration
Statement on Form N-1A (File No. 2-76061).
(b) Amendment to Articles of Incorporation, incorporated by
reference to Exhibit 1 to Post-Effective Amendment No. 10 to the
Registration Statement on Form N-1A (File No. 2-76061).
(c) Amendment of Articles of Incorporation, incorporated by
reference to Exhibit No. 1(c) to Post-Effective Amendment No. 13 to
the Registration Statement on Form N-1A (File No. 2-76061).
(d) Form of Amendment to Articles of Incorporation.*
2. (a) By-Laws of the Registrant, as amended, incorporated by reference
to Exhibit 2 to the Post-Effective Amendment No. 9 to the
Registration Statement on Form N-1A (File No. 2-76061).
(b) Amendment to By-Laws, incorporated by reference to Exhibit No. 2
to Post-Effective Amendment No. 12 to the Registration Statement on
Form N-1A (File No. 2-76061).
(c) Amended and Restated By-Laws.*
4. (a) Specimen stock certificate for Class B shares issued by the
Registrant, incorporated by reference to Exhibit 4 to Post-Effective
Amendment No. 9 to the Registration Statement on Form N-1A (File No.
2-76061).
(b) Specimen stock certificate for Class A shares issued by the
Registrant, incorporated by reference to Exhibit 4(b) to
Post-Effective Amendment No. 13 to the Registration Statement on
Form N-1A (File No. 2-76061).
C-1
<PAGE>
(c) Instruments Defining Rights of Shareholders, incorporated by
reference to Exhibit 4(c) to Post-Effective Amendment No. 17 to the
Registration Statement on Form N-1A (File No. 2-76061).
5. (a) Management Agreement between the Registrant and Prudential
Mutual Fund Management, Inc., incorporated by reference to Exhibit
5(a) to Post-Effective Amendment No. 10 to the Registration
Statement on Form N-1A (File No. 2-76061).
(b) Subadvisory Agreement between Prudential Mutual Fund Management,
Inc. and The Prudential Investment Corporation, incorporated by
reference to Exhibit 5(b) to Post-Effective Amendment No. 10 to the
Registration Statement on Form N-1A (File No. 2-76061).
6. (a) Distribution Agreement, as amended, between the Registrant and
Prudential-Bache Securities Inc., incorporated by reference to
Exhibit 6(a) to Post-Effective Amendment No. 5 to the Registration
Statement on Form N-1A (File No. 2-76061).
(b) Distribution Agreement between the Registrant and Prudential
Mutual Fund Distributors, Inc. for Class A Shares, incorporated by
reference to Exhibit 6(b) to Post-Effective Amendment No. 13 to the
Registration Statement on Form N-1A (File No. 2-76061).
(c) Amended and Restated Distribution Agreement between the
Registrant and Prudential-Bache Securities Inc. for Class B Shares,
incorporated by reference to Exhibit 6(c) to Post-Effective
Amendment No. 13 to the Registration Statement on Form N-1A (File
No. 2-76061).
(d) Selected Dealers Agreement, incorporated by reference to Exhibit
6(d) to the Registration Statement on Form N-1A (File No. 2-76061).
(e)_Form of Distribution Agreement for Class A shares.*
(f)_Form of Distribution Agreement for Class B shares.*
(g)_Form of Distribution Agreement for Class C shares.*
8. Custodian Agreement between the Registrant and State Street Bank and
Trust Company.
9. Transfer Agency and Service Agreement between the Registrant and
Prudential Mutual Fund Services, Inc., incorporated by reference to
Exhibit 8(b) to Post-Effective Amendment No. 9 to the Registration
Statement on Form N-1A (File No. 2-76061).
10. (a) Opinion of Sullivan & Cromwell, incorporated by reference to
Exhibit 10 to Pre-Effective Amendment No. 1 to the Registration
Statement on Form N-1A (File No. 2-76061).
(b) Opinion of Sullivan & Cromwell, incorporated by reference to
Exhibit 10(b) to Post-Effective Amendment No. 17 to the Registration
Statement on Form N-1A (File No. 2-76061).
11. Consent of Independent Accountants.*
13. Purchase Agreement, incorporated by reference to Exhibit 13 to
Pre-Effective Amendment No. 1 to the Registration Statement on Form
N-1A (File No. 2-76061).
15. (a) Plan of Distribution, incorporated by reference to Exhibit 15(a)
to Post-Effective Amendment No. 5 to the Registration Statement on
Form N-1A (File No. 2-76061).
(b) Plan of Distribution for Class A Shares, incorporated by
reference to Exhibit 15(b) to Post-Effective Amendment No. 13 to the
Registration Statement on Form N-1A (File No. 2-76061).
(c) Amended and Restated Plan of Distribution for Class B Shares,
incorporated by reference to Exhibit 15(c) to Post-Effective
Amendment No. 13 to the Registration Statement on Form N-1A (File
No. 2-76061).
(d)_Form of Distribution and Service Plan for Class A shares.*
C-2
<PAGE>
(e)_Form of Distribution and Service Plan for Class B shares.*
(f)_Form of Distribution and Service Plan for Class C shares.*
16. (a) Schedule of Computation of Performance Quotations for Class B
shares, incorporated by reference to Exhibit 16 to Post-Effective
Amendment No. 10 to the Registration Statement on Form N-1A (File
No. 2-76061).
(b) Schedule of Computation of Performance Quotations for Class A
shares, incorporated by reference to Exhibit 16(b) to Post-Effective
Amendment No. 14 to the Registration Statement on Form N-1A (File
No. 2-76061).
(c) Schedule of Calculation of Aggregate Total Return for Class A
and Class B shares incorporated by reference to Exhibit 16(c) to
Post-Effective Amendment No. 15 to the Registration Statement on
Form N-1A (File No. 2-76061).
Other Exhibits
- --------------
*Filed herewith.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
None.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
As of March 31, 1994, there were 512 and 18,915 record holders of Class A and
Class B shares of common stock, $.01 par value per share, issued by the
Registrant, respectively.
ITEM 27. INDEMNIFICATION.
As permitted by Sections 17(h) and (i) of the Investment Company Act of 1940
(the 1940 Act) and pursuant to Article VI of the Fund's By-Laws (Exhibit 2 to
the Registration Statement), officers, directors, employees and agents of the
Registrant will not be liable to the Registrant, any stockholder, officer,
director, employee, agent or other person for any action or failure to act,
except for bad faith, willful misfeasance, gross negligence or reckless
disregard of duties, and those individuals may be indemnified against
liabilities in connection with the Registrant, subject to the same exceptions.
Section 2-418 of Maryland General Corporation Law permits indemnification of
directors who acted in good faith and reasonably believed that the conduct was
in the best interests of the Registrant. As permitted by Section 17(i) of the
1940 Act, pursuant to Section 10 of the Distribution Agreement (Exhibit 6 to the
Registration Statement), the Distributor of the Registrant may be indemnified
against liabilities which it may incur, except liabilities arising from bad
faith, gross negligence, willful misfeasance or reckless disregard of duties.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 (Securities Act) may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
1940 Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer, or controlling
person of the Registrant in connection with the successful defense of any
action, suit or proceeding) is asserted against the Registrant by such director,
officer or controlling person in connection with the shares being registered,
the Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the 1940 Act and will be governed by the final adjudication of such
issue.
C-3
<PAGE>
The Registrant has purchased an insurance policy insuring its officers and
directors against liabilities, and certain costs of defending claims against
such officers and directors, to the extent such officers and directors are not
found to have committed conduct constituting willful misfeasance, bad faith,
gross negligence or reckless disregard in the performance of their duties. The
insurance policy also insures the Registrant against the cost of indemnification
payments to officers and directors under certain circumstances.
Section 9 of the Management Agreement (Exhibit 5(a) to the Registration
Statement) and Section 4 of the Subadvisory Agreement (Exhibit 5(b) to the
Registration Statement) limit the liability of Prudential Mutual Fund
Management, Inc. (PMF) and The Prudential Investment Corporation (PIC),
respectively, to liabilities arising from willful misfeasance, bad faith or
gross negligence in the performance of their respective duties or from reckless
disregard by them of their respective obligations and duties under the
agreements.
The Registrant hereby undertakes that it will apply the indemnification
provisions of its By-Laws and the Distribution Agreement in a manner consistent
with Release No. 11330 of the Securities and Exchange Commission under the 1940
Act so long as the interpretation of Sections 17(h) and 17(i) of such Act remain
in effect and are consistently applied.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
(a) Prudential Mutual Fund Management, Inc.
See "How the Fund is Managed" in the Prospectus constituting Part A of this
Registration Statement and "Manager" in the Statement of Additional Information
constituting Part B of this Registration Statement.
The business and other connections of the officers of PMF 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, filed on November 13, 1987).
The business and other connections of PMF's directors and principal executive
officers are set forth below. Except as otherwise indicated, the address of each
person is One Seaport Plaza, New York, NY 10292.
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH PMF PRINCIPAL OCCUPATIONS
- ----------------------- -------------------- --------------------------------------------------------------
<S> <C> <C>
Brendan D. Boyle Executive Vice Executive Vice President and Director of Marketing, PMF
President and
Director of
Marketing
John D. Brookmeyer, Jr. Director Senior Vice President, The Prudential Insurance Company of
Two Gateway Center America (Prudential); Senior Vice President (PIC)
Newark, NJ 07102
Susan C. Cote Senior Vice Senior Vice President, PMF; Senior Vice President, Prudential
President Securities
Fred A. Fiandaca Executive Vice Executive Vice President, Chief Operating Officer and
Raritan Plaza One President, Chief Director, PMF; Chairman, Chief Operating Officer and
Edison, NJ 08847 Operating Officer Director, Prudential Mutual Fund Services, Inc.
and Director
Stephen P. Fisher Senior Vice Senior Vice President, PMF; Senior Vice President, Prudential
President Securities
</TABLE>
C-4
<PAGE>
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH PMF PRINCIPAL OCCUPATIONS
- ----------------------- -------------------- --------------------------------------------------------------
<S> <C> <C>
Frank W. Giordano Executive Vice Executive Vice President, General Counsel and Secretary, PMF;
President, General Senior Vice President, Prudential Securities
Counsel and
Secretary
Robert F. Gunia Executive Vice Executive Vice President, Chief Administrative Officer, Chief
President, Chief Financial Officer and Director, PMF; Senior Vice President,
Administrative Prudential Securities
Officer, Chief
Financial Officer
and Director
Eugene B. Heimberg Director Senior Vice President, Prudential; President, Director and
Prudential Plaza Chief Investment Officer, PIC
Newark, NJ 07101
Lawrence C. McQuade Vice Chairman Vice Chairman, PMF
Leland B. Paton Director Executive Vice President and Director, Prudential Securities;
Director, Prudential Securities Group, Inc. (PSG)
Richard A. Redeker President, Chief President, Chief Executive Officer and Director, PMF;
Executive Officer Executive Vice President, Director and Member of Operating
and Director Committee, Prudential Securities; Director, PSG
S. Jane Rose Senior Vice Senior Vice President, Senior Counsel and Assistant Secretary,
President, Senior PMF; Senior Vice President and Senior Counsel, Prudential
Counsel and Securities
Assistant Secretary
Donald G. Southwell Director Senior Vice President, Prudential; Director, PSG
213 Washington Street
Newark, NJ 07102
</TABLE>
(b) Prudential Investment Corporation (PIC)
See "How the Fund is Managed--Subadviser" in the Prospectus constituting Part
A of this Registration Statement and "Subadviser" in the Statement of Additional
Information constituting Part B of this Registration Statement.
The business and other connections of PIC's directors and executive officers
are as set forth below. Except as otherwise indicated, the address of each
person is Prudential Plaza, Newark, NJ 07101.
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH PIC PRINCIPAL OCCUPATIONS
- ----------------------- -------------------- --------------------------------------------------------------
<S> <C> <C>
Martin A. Berkowitz Senior Vice Presi- Senior Vice President, Chief Financial Officer and Chief
dent, Chief Compliance Officer, PIC; Vice President, Prudential
Financial Officer
and Chief Compliance
Officer
</TABLE>
C-5
<PAGE>
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH PIC PRINCIPAL OCCUPATIONS
- ----------------------- -------------------- --------------------------------------------------------------
<S> <C> <C>
William M. Bethke Senior Vice Senior Vice President, Prudential; Senior Vice President, PIC
Two Gateway Center President
Newark, NJ 07102
John D. Brookmeyer, Jr. Senior Vice Senior Vice President, Prudential; Senior Vice President, PIC
Two Gateway Center President
Newark, NJ 07102
Eugene B. Heimberg President, Director Senior Vice President, Prudential; President, Director
and Chief and Chief Investment Officer, PIC
Investment Officer
Garnett L. Keith, Jr. Director Vice Chairman and Director, Prudential; Director, PIC
Harry E. Knapp, Jr. Vice President Vice President, Prudential; Vice President, PIC
Four Gateway Center
Newark, NJ 07102
William P. Link Senior Vice Executive Vice President, Prudential; Senior Vice President,
Four Gateway Center President PIC
Newark, NJ 07102
Robert E. Riley Executive Vice Executive Vice President, Prudential; Executive Vice
800 Boylston Avenue President President, PIC; Director, PSG
Boston, MA 02199
James W. Stevens Executive Vice Executive Vice President, Prudential; Executive Vice
Four Gateway Center President President, PIC; Director, PSG
Newark, NJ 07102
Robert C. Winters Director Chairman of the Board and Chief Executive Officer, Prudential;
Director, PIC; Chairman of the Board, PSG
Claude J. Zinngrabe, Executive Vice Vice President, Prudential; Executive Vice President, PIC
Jr. President
</TABLE>
ITEM 29. PRINCIPAL UNDERWRITERS.
(A)(I) PRUDENTIAL SECURITIES INCORPORATED.
Prudential Securities is distributor for Prudential Government Securities
Trust (Intermediate Term Series), The Target Portfolio Trust and for Class B
shares of Prudential Adjustable Rate Securities, Inc., The BlackRock Government
Income Trust, Prudential California Municipal Fund (California Series and
California Income Series), Prudential Equity Fund, Inc., Prudential Equity
Income Fund, Prudential FlexiFund, Prudential Global Fund, Inc.,
Prudential-Bache Global Genesis Fund, Inc. (d/b/a Prudential Global Genesis
Fund), Prudential-Bache Global Natural Resources Fund, Inc. (d/b/a Prudential
Global Natural Resources Fund), Prudential-Bache GNMA Fund, Inc. (d/b/a
Prudential GNMA Fund), Prudential-Bache Government Plus Fund, Inc. (d/b/a
Prudential Government Plus Fund), Prudential Growth Fund, Inc., Prudential-Bache
Growth Opportunity Fund, Inc. (d/b/a Prudential Growth Opportunity Fund),
Prudential-Bache High Yield Fund, Inc. (d/b/a Prudential High Yield Fund),
Prudential IncomeVertible (R) Fund, Inc., Prudential Intermediate Global Income
Fund, Inc., Prudential Multi-Sector Fund, Inc., Prudential Municipal Bond Fund,
Prudential Municipal Series Fund (except Connecticut Money Market Series,
Massachusetts Money Market Series, New York Money Market Series, New Jersey
Money Market Series and Florida Series), Prudential-Bache National Municipals
Fund, Inc. (d/b/a Prudential
C-6
<PAGE>
National Municipals Fund), Prudential Pacific Growth Fund, Inc., Prudential
Short-Term Global Income Fund, Inc., Prudential U.S. Government Fund,
Prudential-Bache Utility Fund, Inc. (d/b/a Prudential Utility Fund), Global
Utility Fund, Inc. and Nicholas-Applegate Fund, Inc. (Nicholas-Applegate Growth
Equity Fund). Prudential Securities is also a depositor for the following unit
investment trusts:
The Corporate Income Fund
Corporate Investment Trust Fund
Equity Income Fund
Government Securities Income Fund
International Bond Fund
Municipal Investment Trust
Prudential Equity Trust Shares
National Equity Trust
Prudential Unit Trusts
Government Securities Equity Trust
National Municipal Trust
(II) PRUDENTIAL MUTUAL FUND DISTRIBUTORS, INC.
Prudential Mutual Fund Distributors, Inc. is distributor for Command
Government Fund, Command Money Fund, Command Tax-Free Fund, Prudential
California Municipal Fund (California Money Market Series and Class A shares of
the California Series and California Income Series), Prudential Government
Securities Trust (Money Market Series and U.S. Treasury Money Market Series),
Prudential-Bache MoneyMart Assets (d/b/a Prudential MoneyMart Assets),
Prudential Municipal Series Fund (Connecticut Money Market Series, Massachusetts
Money Market Series, New York Money Market Series and New Jersey Money Market
Series), Prudential Institutional Liquidity Portfolio, Inc., Prudential-Bache
Special Money Market Fund, Inc. (d/b/a Prudential Special Money Market Fund),
Prudential-Bache Structured Maturity Fund, Inc. (d/b/a Prudential Structured
Maturity Fund), Prudential-Bache Tax-Free Money Fund, Inc. (d/b/a Prudential
Tax-Free Money Fund), and for Class A shares of Prudential Adjustable Rate
Securities Fund, Inc., The BlackRock Government Income Trust, Prudential
California Municipal Fund (California Series and California Income Series),
Prudential Equity Fund, Inc., Prudential Equity Income Fund, Prudential
FlexiFund, Prudential Global Fund, Inc., Prudential-Bache Global Genesis Fund,
Inc. (d/b/a Prudential Global Genesis Fund), Prudential-Bache Global Natural
Resources Fund, Inc. (d/b/a Prudential Global Natural Resources Fund),
Prudential-Bache GNMA Fund, Inc. (d/b/a Prudential GNMA Fund), Prudential-Bache
Government Plus Fund, Inc. (d/b/a Prudential Government Plus Fund), Prudential
Growth Fund, Inc., Prudential-Bache Growth Opportunity Fund, Inc. (d/b/a
Prudential Growth Opportunity Fund), Prudential-Bache High Yield Fund, Inc.
(d/b/a Prudential High Yield Fund), Prudential IncomeVertible(R) Fund, Inc.,
Prudential Intermediate Global Income Fund, Inc., Prudential Multi-Sector Fund,
Inc., Prudential Municipal Bond Fund, Prudential Municipal Series Fund (Arizona
Series, Florida Series, Georgia Series, Maryland Series, Massachusetts Series,
Michigan Series, Minnesota Series, New Jersey Series, North Carolina Series,
Ohio Series and Pennsylvania Series), Prudential-Bache National Municipals Fund,
Inc. (d/b/a Prudential National Municipals Fund), Prudential Pacific Growth
Fund, Inc., Prudential Short-Term Global Income Fund, Inc., Prudential U.S.
Government Fund and Prudential-Bache Utility Fund, Inc. (d/b/a Prudential
Utility Fund), Global Utility Fund, Inc., and Nicholas-Applegate Fund, Inc.
(Nicholas-Applegate Growth Equity Fund) and The Target Portfolio Trust.
C-7
<PAGE>
(b)(i) Information concerning the directors and officers of Prudential
Securities Incorporated is set forth below.
<TABLE>
<CAPTION>
POSITIONS AND POSITIONS AND
OFFICES WITH OFFICES WITH
NAME(1) UNDERWRITER REGISTRANT
- ---------------------- ---------------------------------------- -------------
<S> <C> <C>
Alan D. Hogan......... Executive Vice President, Chief None
Administrative Officer and
Director
<FN>
- --------------
(1)The address of each person named is One Seaport Plaza, New York, NY 10292
unless otherwise indicated.
</TABLE>
C-8
<PAGE>
<TABLE>
<CAPTION>
POSITIONS AND POSITIONS AND
OFFICES WITH OFFICES WITH
NAME(1) UNDERWRITER REGISTRANT
- ---------------------- ---------------------------------------- -------------
<S> <C> <C>
Howard A. Knight...... Executive Vice President, Director, None
Corporate Strategy and New Business
Development
George A. Murray...... Executive Vice President and Director None
John P. Murray........ Executive Vice President and Director of None
Risk Management
Leland B. Paton....... Executive Vice President and None
Director
Richard A. Redeker.... Director Director
Hardwick Simmons...... Chief Executive Officer, President and None
Director
Lee Spencer........... Interim General Counsel None
</TABLE>
(ii) Information concerning the officers and directors of Prudential Mutual
Fund Distributors, Inc. is set forth below.
<TABLE>
<CAPTION>
POSITIONS AND POSITIONS AND
OFFICES WITH OFFICES WITH
NAME(1) UNDERWRITER REGISTRANT
- ---------------------- ---------------------------------------- -------------
<S> <C> <C>
Joanne Accurso-Soto... Vice President None
Dennis Annarumma...... Vice President, Assistant Treasurer and None
Assistant Comptroller
Phyllis J. Berman..... Vice President None
Fred A. Fiandaca...... President, Chief Executive Officer and None
Raritan Plaza One Director
Edison, NJ 08847
Stephen P. Fisher..... Vice President None
Frank W. Giordano..... Executive Vice President, General None
Counsel, Secretary and Director
Robert F. Gunia....... Executive Vice President, Treasurer, Vice
Comptroller and Director President
Andrew J. Varley...... Vice President None
Anita L. Whelan....... Vice President and Assistant Secretary None
<FN>
- --------------
(1)The address of each person named is One Seaport Plaza, New York, NY 10292
unless otherwise indicated.
</TABLE>
(c) Registrant has no principal underwriter who is not an affiliated person of
the Registrant.
C-9
<PAGE>
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.
All accounts, books and other documents required to be maintained by Section
31(a) of the 1940 Act and the Rules thereunder are maintained at the offices of
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, The Prudential Investment Corporation, Prudential Plaza,
745 Broad Street, Newark, New Jersey, the Registrant, One Seaport Plaza, New
York, New York, and Prudential Mutual Fund Services, Inc., Raritan Plaza One,
Edison, New Jersey. Documents required by Rules 31a-1(b)(5), (6), (7), (9), (10)
and (11) and 31a-1(f) will be kept at Two Gateway Center, documents required by
Rules 31a-1(b)(4) and (11) and 31a-1(d) at One Seaport Plaza and the remaining
accounts, books and other documents required by such other pertinent provisions
of Section 31(a) and the Rules promulgated thereunder will be kept by State
Street Bank and Trust Company and Prudential Mutual Fund Services, Inc.
ITEM 31. MANAGEMENT SERVICES.
Other than as set forth under the captions "How the Fund is Managed--Manager"
and "How the Fund is Managed--Distributor" in the Prospectus and the captions
"Manager" and "Distributor" in the Statement of Additional Information,
constituting Parts A and B, respectively, of this Registration Statement,
Registrant is not a party to any management-related service contract.
ITEM 32. UNDERTAKINGS.
The Registrant hereby undertakes to furnish each person to whom a Prospectus
is delivered with a copy of Registrants' latest annual report to shareholders
upon request and without charge.
C-10
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, 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 9th day of May, 1994.
PRUDENTIAL-BACHE GNMA FUND, INC.
(doing business as Prudential GNMA Fund)
/s/ Lawrence C. McQuade
-----------------------------------------------------------------------
(LAWRENCE C. MCQUADE, 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/ Lawrence C. McQuade President and Director May 9, 1994
- ---------------------------------
LAWRENCE C. MCQUADE
/s/ Edward D. Beach Director May 9, 1994
- ---------------------------------
EDWARD D. BEACH
/s/ Eugene C. Dorsey Director May 9, 1994
- ---------------------------------
EUGENE C. DORSEY
/s/ Delayne D. Gold Director May 9, 1994
- ---------------------------------
DELAYNE D. GOLD
/s/ Harry A. Jacobs Director May 9, 1994
- ---------------------------------
HARRY A. JACOBS, JR.
/s/ Thomas T. Mooney Director May 9, 1994
- ---------------------------------
THOMAS T. MOONEY
/s/ Thomas H. O'Brien Director May 9, 1994
- ---------------------------------
THOMAS H. O'BRIEN
/s/ Richard A. Redeker Director May 9, 1994
- ---------------------------------
RICHARD A. REDEKER
- --------------------------------- Director
NANCY HAYS TEETERS
/s/ Susan C. Cote Principal Financial and May 9, 1994
- --------------------------------- Accounting Officer
SUSAN C. COTE
</TABLE>
<PAGE>
EXHIBIT INDEX
1. (a) Articles of Incorporation, as amended.*
(b) Amendment to Articles of Incorporation.*
(c) Amendment of Articles of Incorporation.*
(d) Form of Amendment to Articles of Incorporation.**
2. (a) By-Laws of the Registrant, as amended.*
(b) Amendment to By-Laws.*
(c) Amended and Restated By-Laws.**
4. (a) Specimen stock certificate for Class B shares issued by the Registrant.*
(b) Specimen stock certificate for Class A shares issued by the Registrant.*
(c) Instruments Defining Rights of Shareholders.*
5. (a) Management Agreement between the Registrant and Prudential Mutual Fund
Management, Inc.*
(b) Subadvisory Agreement between Prudential Mutual Fund Management, Inc.
and The Prudential Investment Corporation.*
6. (a) Distribution Agreement, as amended, between the Registrant and
Prudential-Bache Securities Inc.*
(b) Distribution Agreement between the Registrant and Prudential Mutual Fund
Distributors, Inc. for Class A Shares.*
(c) Amended and Restated Distribution Agreement between the Registrant and
Prudential-Bache Securities Inc. for Class B Shares.*
(d) Selected Dealers Agreement.*
(e) Form of Distribution Agreement for Class A shares.**
(f) Form of Distribution Agreement for Class B shares.**
(g) Form of Distribution Agreement for Class C shares.**
8. Custodian Agreement between the Registrant and State Street Bank and Trust
Company.
9. Transfer Agency and Service Agreement between the Registrant and Prudential
Mutual Fund Services, Inc.*
10. (a) Opinion of Sullivan & Cromwell.*
(b) Opinion of Sullivan & Cromwell.*
11. Consent of Independent Accountants.**
13. Purchase Agreement.*
15. (a) Plan of Distribution.*
(b) Plan of Distribution for Class A Shares.*
(c) Amended and Restated Plan of Distribution for Class B Shares.*
(d) Form of Distribution and Service Plan for Class A shares.**
(e) Form of Distribution and Service Plan for Class B shares.**
(f) Form of Distribution and Service Plan for Class C shares.**
16. (a) Schedule of Computation of Performance Quotations for Class B shares.*
(b) Schedule of Computation of Performance Quotations for Class A shares.*
(c) Schedule of Calculation of Aggregate Total Return for Class A and Class
B shares.*
Other Exhibits
- --------------
*Previously filed.
**Filed herewith.
<PAGE>
EXHIBIT 99.1(d)
FORM OF AMENDMENT TO ARTICLES OF INCORPORATION
Article V, Section 1 of the Fund's Articles of Incorporation is proposed
to be amended and restated as follows:
ARTICLE V
COMMON STOCK
Section 1. The total number of shares of capital stock which the
Corporation shall have authority to issue is 500,000,000 shares of the par value
of $.0l per share and of the aggregate par value of $5,000,000 to be divided
initially into three classes, consisting of 166,666,666 shares of Class A Common
Stock, 166,666,666 shares of Class B Common Stock and 166,666,668 shares of
Class C Common Stock.
(a) Each share of Class A, Class B and Class C Common Stock of the
Corporation shall represent the same interest in the Corporation and have
identical voting, dividend, liquidation and other rights except that (i)
Expenses related to the distribution of each class of shares shall be borne
solely by such class; (ii) The bearing of such expenses solely by shares of
each class shall be appropriately reflected (in the manner determined by
the Board of Directors) in the net asset value, dividends, distribution and
liquidation rights of the shares of such class; (iii) The Class A Common
Stock shall be subject to a front-end sales load and a Rule 12b-1
distribution fee as determined by the Board of Directors from time to time;
(iv) The Class B Common Stock shall be subject to a contingent deferred
sales charge and a Rule 12b-1 distribution fee as determined by the Board
of Directors from time to time; and (v) The Class C Common Stock shall be
subject to a contingent deferred sales charge and a Rule 12b-1 distribution
fee as determined by the Board of Directors from time to time. All shares
of each particular class shall represent an equal proportionate interest in
that class, and each share of any particular class shall be equal to each
other share of that class.
(b) Each share of the Class B Common Stock of the Corporation, shall
converted automatically, and without any action or choice on the part of
the holder thereof, into shares (including fractions thereof) of the
Class A Common Stock of the Corporation (computed in the manner hereinafter
described), at the applicable net asset value of each Class, at the time of
the calculation of the net asset value of such Class B Common Stock at such
times, which may vary between shares originally issued for cash and shares
purchased through the automatic reinvestment of dividends and distributions
with respect to Class B Common Stock (each "Conversion Date"), determined
by the Board of Directors in accordance with applicable laws, rules,
regulations, and interpretations of the Securities and Exchange Commission
and the National Association of Securities
B-1
<PAGE>
Dealers, Inc. and pursuant to such procedures as may be established from
time to time by the Board of Directors and disclosed in the Corporation's
then current prospectus for such Class A and Class B Common Stock.
(c) The number of shares of the Class A Common Stock of the
Corporation into which a share of the Class B Common Stock is converted
pursuant to Section (1)(b) hereof shall equal the number (including for
this purpose fractions of a share) obtained by dividing the net asset value
per share of the Class B Common Stock for purposes of sales and redemptions
thereof at the time of the calculation of the net asset value on the
Conversion Date by the net asset value per share of the Class A Common
Stock for purposes of sales and redemptions thereof at the time of the
calculation of the net asset value of the Conversion Date.
(d) On the Conversion Date, the shares of the Class B Common Stock of
the Corporation converted into shares of the Class A Common Stock will
cease to accrue dividends and will no longer be outstanding and the rights
of the holders thereof will cease (except the right to receive declared but
unpaid dividends to the Conversion Date).
(e) The Board of Directors shall have full power and authority to
adopt such other terms and conditions concerning the conversion of shares
of the Class B Common Stock to shares of the Class A Common Stock as they
deem appropriate; provided such terms and conditions are not inconsistent
with the terms contained in this Section 1 and subject to any restrictions
or requirements under the Investment Company Act of 1940 and the rules,
regulations and interpretations thereof promulgated or issued by the
Securities and Exchange Commission, any conditions or limitations contained
in an order issued by the Securities and Exchange Commission applicable
to the Corporation, or any restrictions or requirements under the
Internal Revenue Code of 1986, as amended, and the rules, regulations and
interpretations promulgated or issued thereunder.
B-2
<PAGE>
EXHIBIT 99.2(c)
PRUDENTIAL GNMA FUND, INC.
Amended and Restated By-Laws
ARTICLE I
STOCKHOLDERS
Section 1. PLACE OF MEETING. All meetings of the stockholders shall be
held at the principal office of the Corporation in the State of Maryland or at
such other place within the United States as may from time to time be designated
by the Board of Directors and stated in the notice of such meeting.
Section 2. ANNUAL MEETINGS. The annual meeting of the stockholders of
the Corporation shall be held in the month of April of each year on such date
and at such hour as may from time to time be designated by the Board of
Directors and stated in the notice of such meeting, for the purpose of electing
directors for the ensuing year and for the transaction of such other business as
may properly be brought before the meeting.
Section 3. SPECIAL OR EXTRAORDINARY MEETINGS. Special or extraordinary
meetings of the stockholders for any purpose or purposes may be called by the
Chairman of the Board, the President or a majority of the Board of Directors,
and shall be called by the Secretary upon receipt of the request in writing
signed by stockholders holding not less than 25% of the common stock issued and
outstanding and entitled to vote thereat. Such request shall state the purpose
or purposes of the proposed meeting. The Secretary shall inform such
stockholders of the reasonably estimated costs of preparing and mailing such
notice of meeting and
<PAGE>
upon payment to the Corporation of such costs, the Secretary shall give notice
stating the purpose or purposes of the meeting as required in this Article and
by-law to all stockholders entitled to notice of such meeting. No special
meeting need be called upon the request of the holders of shares entitled to
cast less than a majority of all votes entitled to be cast at such meeting to
consider any matter which is substantially the same as a matter voted upon at
any special meeting of stockholders held during the preceding twelve months.
Section 4. NOTICE OF MEETINGS OF STOCKHOLDERS. Not less than ten days'
and not more than ninety days' written or printed notice of every meeting of
stockholders, stating the time and place thereof (and the general nature of the
business proposed to be transacted at any special or extraordinary meeting),
shall be given to each stockholder entitled to vote thereat by leaving the same
with him or at his residence or usual place of business or by mailing it,
postage prepaid, and addressed to him at his address as it appears upon the
books of the Corporation. If mailed, notice shall be deemed to be given when
deposited in the United States mail addressed to the stockholder as aforesaid.
No notice of the time, place or purpose of any meeting of stockholders need
be given to any stockholder who attends in person or by proxy or to any
stockholder who, in writing executed and filed with the records of the meeting,
either before or after the holding thereof, waives such notice.
2
<PAGE>
Section 5. RECORD DATE. The Board of Directors may fix, in advance, a
date not exceeding ninety days preceding the date of any meeting of
stockholders, any dividend payment date or any date for the allotment of rights,
as a record date for the determination of the stockholders entitled to notice of
and to vote at such meeting or entitled to receive such dividends or rights, as
the case may be; and only stockholders of record on such date shall be entitled
to notice of and to vote at such meeting or to receive such dividends or rights,
as the case may be. In the case of a meeting of stockholders, such date shall
not be less than ten days prior to the date fixed for such meeting.
Section 6. QUORUM, ADJOURNMENT OF MEETINGS. The presence in person or
by proxy of the holders of record of a majority of the shares of the common
stock of the Corporation issued and outstanding and entitled to vote thereat
shall constitute a quorum at all meetings of the stockholders except as
otherwise provided in the Articles of Incorporation. If, however, such quorum
shall not be present or represented at any meeting of the stockholders, the
holders of a majority of the stock present in person or by proxy shall have
power to adjourn the meeting from time to time, without notice other than
announcement at the meeting, until the requisite amount of stock entitled to
vote at such meeting shall be present. At such adjourned meeting at which the
requisite amount of stock entitled to vote thereat shall be represented any
business may be transacted which might have been transacted at the meeting as
originally notified.
3
<PAGE>
Section 7. VOTING AND INSPECTORS. At all meetings, stockholders of
record entitled to vote thereat shall have one vote for each share of common
stock standing in his name on the books of the Corporation (and such
stockholders of record holding fractional shares, if any, shall have
proportionate voting rights) on the date for the determination of stockholders
entitled to vote at such meeting, either in person or by proxy appointed by
instrument in writing subscribed by such stockholder or his duly authorized
attorney.
All elections shall be had and all questions decided by a majority of the
vote cast at a duly constituted meeting ,except as otherwise provided by statute
or by the Articles of Incorporation or by these By-Laws.
At any election of Directors, the Chairman of the meeting may, and upon the
request of the holders of ten per cent (10%) of the stock entitled to vote at
such election shall, appoint two inspectors of election who shall first
subscribe an oath or affirmation to execute faithfully the duties of inspectors
at such election with strict impartiality and according to the best of their
ability, and shall after the election make a certificate of the result of the
vote taken. No candidate for the office of Director shall be appointed such
Inspector.
Section 8. CONDUCT OF STOCKHOLDERS' MEETINGS. The meetings of the
stockholders shall be presided over by the Chairman of the Board, or if he is
not present, by the President, or if he is not present, by a Vice-President, or
if none of them is present,
4
<PAGE>
by a Chairman to be elected at the meeting. The Secretary of the Corporation,
if present, shall act as a Secretary of such meetings, or he is not present, an
Assistant Secretary shall so act; if neither the Secretary nor the Assistant
Secretary is present, then the meeting shall elect its Secretary.
Section 9. CONCERNING VALIDITY OF PROXIES, BALLOTS, ETC. At every
meeting of the stockholders, all proxies shall be received and taken in charge
of and all ballots shall be received and canvassed by the Secretary of the
meeting, who shall decide all questions touching the qualification of voters,
the validity of the proxies and the acceptance or rejection of votes, unless
inspectors of election shall have been appointed by the Chairman of the meeting,
in which event such inspectors of election shall decide all such questions.
ARTICLE II
BOARD OF DIRECTORS
Section 1. NUMBER AND TENURE OF OFFICE. The business and affairs of
the Corporation shall be conducted and managed by a Board of Directors of not
less than three nor more than nine Directors, as may be determined from time to
time by vote of a majority of the Directors then in office. Directors need not
be stockholders.
Section 2. VACANCIES. In case of any vacancy in the Board of Directors
through death, resignation or other cause, other than an increase in the number
of Directors, a majority of the remaining Directors, although a majority is less
than a quorum, by an
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affirmative vote, may elect a successor to hold office until the next annual
meeting of stockholders or until his successor is chosen and qualifies.
Section 3. INCREASE OR DECREASE IN NUMBER OF DIRECTORS. The Board of
Directors, by the vote of a majority of the entire Board, may increase the
number of Directors and may elect Directors to fill the vacancies created by any
such increase in the number of Directors until the next annual meeting or until
their successors are duly chosen and qualified. The Board of Directors, by the
vote of a majority of the entire Board, may likewise decrease the number of
Directors to a number not less than three.
Section 4. PLACE OF MEETING. The Directors may hold their meetings,
have or more offices, and keep the books of the Corporation, outside the State
of Maryland, at any office or offices of the Corporation or at any other place
as they may from time to time by resolution determine, or in the case of
meetings, as they may from time to time by resolution determine or as shall be
specified or fixed in the respective notices or waivers of notice thereof.
Section 5. REGULAR MEETINGS. Regular meetings of the Board of
Directors shall be held at such time and on such notice as the Directors may
from time to time determine.
The annual meeting of the Board of Directors shall be held as soon as
practicable after the annual meeting of the stockholders for the election of
Directors.
Section 6. SPECIAL MEETINGS. Special meetings of the
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Board of Directors may be held from time to time upon call of the Chairman of
the Board, the President, the Secretary or two or more of the Directors, by oral
or telegraphic or written notice duly served on or sent or mailed to each
Director not less than one day before such meeting. No notice need be given to
any Director who attends in person or to any Director who, in writing executed
and filed with the records of the meeting either before or after the holding
thereof, waives such notice. Such notice or waiver of notice need not state the
purpose or purposes of such meeting.
Section 7. QUORUM. One-third of the Directors then in office shall
constitute a quorum for the transaction of business, provided that a quorum
shall in no case be less than two Directors. If at any meeting of the Board
there shall be less than a quorum present, a majority of those present may
adjourn the meeting from time to time until a quorum shall have been obtained.
The act of the majority of the Directors present at any meeting at which there
is a quorum shall be the act of the Directors, except as may be otherwise
specifically provided by statute or by the Articles of Incorporation or by these
By-Laws.
Section 8. EXECUTIVE COMMITTEE. The Board of Directors may, by the
affirmative vote of a majority of the whole Board, appoint from the Directors an
Executive Committee to consist of such number of Directors (not less than three)
as the Board may from time to time determine. The Chairman of the Committee
shall be elected by the Board of Directors. The Board of Directors by such
affirmative vote shall have power at any time to change the
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members of such Committee and may fill vacancies in the Committee by election
from the Directors. When the Board of Directors is not is session, to the
extent permitted by law the Executive Committee shall have and may exercise any
or all of the powers of the Board of Directors in the management of the business
and affairs of the Corporation. Executive Committee may fix its own rules of
procedure, any may meet when and as provided by such rules or by resolution of
the Board of Directors, but in every case the present of a majority shall be
necessary to constitute a quorum. During the absence of a member of the
Executive Committee, the remaining members may appoint a member of the Board of
Directors to act in his place.
Section 9. OTHER COMMITTEES. The Board of Directors, by the
affirmative vote of a majority of the whole Board, may appoint from the
Directors other committees which shall in each case consist of such number of
Directors (not less than two) and shall have and may exercise such powers as the
Board may determine in the resolution appointing them. A majority of all the
members of any such committee may determine its action and fix the time and
place of its meetings, unless the Board of Directors shall otherwise provide.
The Board of Directors shall have power at any time to change the members and
powers of any such committee, to fill vacancies and to discharge any such
committee.
Section 10. TELEPHONE MEETINGS. Members of the Board of Directors or a
committee of the Board of Directors may participate in a meeting by means of a
conference telephone or similar
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communications equipment if all persons participating in the meeting can hear
each other at the same time. Participation in a meeting by these means
constitutes presence in person at the meeting.
Section 11. ACTION WITHOUT A MEETING. Any action required or permitted
to be taken at any meeting of the Board of Directors or any committee thereof
may be taken without a meeting, if a written consent to such action is signed by
all members of the Board or of such committee, as the case may be, and such
written consent is filed with the minutes of the proceedings of the Board or
committee.
Section 12. COMPENSATION OF DIRECTORS. No Director shall receive any
stated salary or fees from the Corporation for his services as such if such
Director is, otherwise than by reason of being such Director, an interested
person (as such term is defined by the Investment Company Act of 1940) of the
Corporation or of its investment adviser, administrator or principal
underwriter. Except as provided in the preceding sentence, Directors shall be
entitled to receive such compensation from the Corporation for their services as
may from time to time be vote by the Board of Directors.
Section 13. NOMINATING COMMITTEE. The Board of Directors may by the
affirmative vote of a majority of the entire Board appoint from its members a
Nominating Committee composed of two or more directors who are not "interested
persons" (as defined in the Investment Company Act of 1940) of the Corporation,
as the Board
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may from time to time determine. The Nominating Committee shall be empowered to
elect its own chairman who may call, or direct the Secretary of the Corporation
to call meetings in accordance with the notice provisions of these By-Laws
otherwise applicable to meetings of the Board of Directors. The Nominating
Committee shall recommend to the Board a slate of persons who are not
"interested persons" (as defined in the Investment Company Act of 1940) of the
Corporation, which may include members of the Nominating Committee, to be
nominated for election as directors by the stockholders at each annual meeting
of stockholders and to fill any vacancy occurring for any reason among the
directors who are not such interested persons.
ARTICLE III
OFFICERS
Section 1. EXECUTIVE OFFICERS. The executive officers of the
Corporation shall be chosen by the Board of Directors as soon as may be
practicable after the annual meeting of the stockholders. These may include a
Chairman of the Board of Directors (who shall be a Director) and shall include a
President (who shall be a Director), one or more Vice-Presidents (the number
thereof to be determined by the Board of Directors), a Secretary and a
Treasurer. The Board of Directors or the Executive Committee may also in its
discretion appoint Assistant Secretaries, Assistant Treasurers and other
officers, agents and employees, who shall have such authority and perform such
duties as the Board or the Executive Committee may determine. The Board of
Directors may fill any vacancy which may
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occur in any office. Any two offices, except those of President and Vice-
President, may be held by the same person, but no officer shall execute,
acknowledge or verify any instrument in more than one capacity, if such
instrument is required by law or these By-Laws to be executed, acknowledged or
verified by two or more officers.
Section 2. TERM OF OFFICE. The term of office of all officers shall be
one year and until their respective successors are chose and qualified. Any
officer may be removed from office at any time with or without cause by the vote
of a majority of the whole Board of Directors.
Section 3. POWERS AND DUTIES. The officers of the Corporation shall
have such powers and duties as generally pertain to their respective offices, as
well as such powers and duties as may from time to time be conferred by the
Board of Directors or the Executive Committee.
ARTICLE IV
CAPITAL STOCK
Section 1. CERTIFICATES FOR SHARES. Each stockholder of the
Corporation shall be entitled to a certificate or certificates for the full
shares of stock of the Corporation owned by him in such form as the Board may
from time to time prescribe.
Section 2. TRANSFER OF SHARES. Shares of the Corporation shall be
transferable on the books of the Corporation by the holder thereof in person or
by his duly authorized attorney or legal representative, upon surrender and
cancellation of certificates, if
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any, for the same number of shares, duly endorse or accompanied by proper
instruments of assignment and transfer, with such proof of the authenticity of
the signature as the Corporation or its agents may reasonably require; in the
case of shares not represented by certificates, the sam or similar requirements
may be imposed by the Board of Directors.
Section 3. STOCK LEDGERS. The stock ledgers of the Corporation,
containing the names and addresses of the stockholders and the number of shares
held by them respectively, shall be kept at the principal offices of the
Corporation or, if the Corporation employs a Transfer Agent, at the offices of
the Transfer Agent of the Corporation.
Section 4. LOST, STOLEN OR DESTROYED CERTIFICATES. The Board of
Directors or the Executive Committee may determine the conditions upon which a
new certificate of stock of the Corporation of any class may be issued in place
of a certificate which is alleged to have been lost, stolen or destroyed; and
may, in its discretion, require the owner of such certificate of his legal
representative to give bond, with sufficient surety, to the Corporation and each
Transfer Agent, if any, to indemnify it and each transfer agent against any and
all loss or claims which may arise by reason of the issue of a new certificate
in the place of the one so lost, stolen or destroyed.
ARTICLE V
CORPORATE SEAL
The Board of Directors may provide for a suitable corporate
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seal, in such form and bearing such inscriptions at it may determine.
ARTICLE VI
FISCAL YEAR
The fiscal year of the Corporation shall begin on the first day of January
and shall end on the 31st day of December in each year.
ARTICLE VII
INDEMNIFICATION
The Corporation shall indemnify directors, officers, employees and agents
of the Corporation against judgments, fines, settlements and expenses to the
fullest extent authorized, and in the manner permitted, by applicable federal
and state law.
ARTICLE VIII
CUSTODIAN
Section 1. The Corporation shall have as custodian or custodians one or
more trust companies or banks of good standing, each having a capital, surplus
and undivided profits aggregating not less than fifty million dollars
($50,000,000), and, to the extent required by the Investment Company Act of
1940, the funds and securities held by the Corporation shall be kept in the
custody of one or more such custodians, provided such custodian or custodians
can be found ready and willing to act, and further provided that the Corporation
may use as subcustodians, for the purpose of holding any foreign securities and
related funds of the
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Corporation such foreign banks as the Board of Directors may approve and as
shall be permitted by law.
Section 2. The Corporation shall upon the resignation or inability to
serve of its custodian or upon change of the custodian:
(i) in case of such resignation or inability to serve, use its
best efforts to obtain a successor custodian;
(ii) require that the cash and securities owned by the
Corporation be delivered directly to the successor custodian; and
(iii) in the event that no successor custodian can be found,
submit to the stockholders before permitting delivery of the cash and
securities owned by the Corporation otherwise than to a successor
custodian, the question whether or not this Corporation shall be
liquidated or shall function without a custodian.
ARTICLE X
AMENDMENT OF BY-LAWS
The By-Laws of the Corporation may be altered, amended, added to or
repealed by the stockholders or by majority vote of the entire Board of
Directors; but any such alteration, amendment, addition or repeal of the By-Laws
by action of the Board of Directors may be altered or repealed by stockholders.
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EXHIBIT 99.6(e)
PRUDENTIAL _________ FUND
Form of
Distribution Agreement
(CLASS A SHARES)
Agreement made as of _____________199_, between Prudential ________
Fund [a Maryland Corporation/Massachusetts Business Trust] (the Fund) and
Prudential Mutual Fund Distributors, Inc., a Delaware Corporation (the
Distributor).
WITNESSETH
WHEREAS, the Fund is registered under the Investment Company Act of
1940, as amended (the Investment Company Act), as a diversified, open-end,
management investment company and it is in the interest of the Fund to offer its
Class A shares for sale continuously;
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 Class A
shares from and after the date hereof in order to promote the growth of the Fund
and facilitate the distribution of its Class A shares; and
WHEREAS, upon approval by the Class A shareholders of the Fund it is
contemplated that the Fund will adopt a plan of distribution pursuant to Rule
12b-1 under the Investment Company Act (the Plan) authorizing payments by the
Fund to the Distributor with respect to the distribution of Class A shares of
the Fund and the maintenance of Class A 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 Class A shares of the Fund to sell Class A shares to the
public and the Distributor hereby accepts such appointment and agrees to act
hereunder. The Fund hereby agrees during the term of this Agreement to sell
Class A shares of the Fund to 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 Class A shares,
except that:
2.1 The exclusive rights granted to the Distributor to purchase Class
A shares from the Fund shall not apply to Class A 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 Class A shares issued by
the Fund pursuant to reinvestment of dividends or capital gains distributions.
2.3 Such exclusive rights shall not apply to Class A 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 CLASS A SHARES FROM THE FUND
3.1 The Distributor shall have the right to buy from the Fund the
Class A shares needed, but not more than the Class A shares needed (except for
clerical errors in transmission) to fill unconditional orders for Class A shares
placed with the Distributor by investors or registered and qualified securities
dealers and other financial institutions (selected dealers). The price which
the Distributor shall pay for the Class A shares so purchased from the Fund
shall be the net asset value, determined as set forth in the Prospectus.
3.2 The Class A shares are to be resold 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.
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3.3 The Fund shall have the right to suspend the sale of its Class A
shares at times when redemption is suspended pursuant to the conditions in
Section 4.3 hereof or at such other times as may be determined by the Board of
Directors. The Fund shall also have the right to suspend the sale of its Class
A shares if a banking moratorium shall have been declared by federal or New York
authorities.
3.4 The Fund, or any agent of the Fund designated in writing by the
Fund, shall be promptly advised of all purchase orders for Class A 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 Class A 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 Class A 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 CLASS A SHARES BY THE FUND
4.1 Any of the outstanding Class A shares may be tendered for
redemption at any time, and the Fund agrees to repurchase or redeem the Class A
shares so tendered in accordance with its Articles of Incorporation as amended
from time to time, and in accordance with the applicable provisions of the
Prospectus. The price to be paid to redeem or repurchase the Class A 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 calendar day subsequent to its having received the
notice of redemption in proper form. The proceeds of any redemption of Class A
shares shall be paid by the Fund to or for the account of the redeeming
shareholder, in each case in accordance with applicable provisions of the
Prospectus.
4.3 Redemption of Class A 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,
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so permits.
Section 5. DUTIES OF THE FUND
5.1 Subject to the possible suspension of the sale of Class A shares
as provided herein, the Fund agrees to sell its Class A shares so long as it has
Class A shares available.
5.2 The Fund shall furnish the Distributor copies of all information,
financial statements and other papers which the Distributor may reasonably
request for use in connection with the distribution of Class A 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 of Directors and the shareholders, all necessary
action to fix the number of authorized Class A shares and such steps as may be
necessary to register the same under the Securities Act, to the end that there
will be available for sale such number of Class A shares as the Distributor
reasonably may expect to sell. The Fund agrees to file from time to time such
amendments, reports and other documents as may be necessary in order that there
will be no untrue statement of a material fact in the Registration Statement, or
necessary in order that there will be no omission to state a material fact in
the Registration Statement which omission would make the statements therein
misleading.
5.4 The Fund shall use its best efforts to qualify and maintain the
qualification of any appropriate number of its Class A shares for sales under
the securities laws of such states as the Distributor and the Fund may approve;
provided that the Fund shall not be required to amend its Articles of
Incorporation or By-Laws to comply with the laws of any state, to maintain an
office in any state, to change the terms of the offering of its Class A 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 Class
A shares. Any such qualification may be withheld, terminated or withdrawn by
the Fund at any time in its discretion. As provided in Section 9.1 hereof, the
expense of qualification and maintenance of qualification shall be borne by the
Fund. The Distributor shall furnish such information and other material
relating to its affairs and activities as may be required by the Fund in
connection with such qualifications.
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Section 6. DUTIES OF THE DISTRIBUTOR
6.1 The Distributor shall devote reasonable time and effort to effect
sales of Class A shares of the Fund, but shall not be obligated to sell any
specific number of Class A shares. Sales of the Class A 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 Class A 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 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 Class A shares, provided
that the Fund shall approve the forms of such agreements. Within the United
States, the Distributor shall offer and sell Class A shares only to such
selected dealers as are members in good standing of the NASD. Class A 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
The Distributor shall receive and may retain any portion of any
front-end sales charge which is imposed on sales of Class A shares and not
reallocated to selected dealers as set forth in the Prospectus, subject to the
limitations of Article III, Section 26 of the NASD Rules of Fair Practice.
Payment of these amounts to the Distributor is not contingent upon the adoption
or continuation of the Plan.
Section 8. PAYMENT OF THE DISTRIBUTOR UNDER THE PLAN
8.1 The Fund shall pay to the Distributor as compensation for
services under the Distribution and Service Plan and this Agreement a fee of .30
of 1% (including an asset-based sales charge of .05 of 1% and a service fee of
.25 of 1%) per annum
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of the average daily net assets of the Class A shares of the Fund. Amounts
payable under the Plan shall be accrued daily and paid monthly or at such other
intervals as Directors/Trustees may determine. Amounts payable under the Plan
shall be subject to the limitations of Article III, Section 26 of the NASD Rules
of Fair Practice.
8.2 So long as the Plan or any amendment thereto is in effect, the
Distributor shall inform the Board of Directors 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 dealer
agreements with the Distributor. So long as the Plan (or any amendment thereto)
is in effect, at the request of the Board of Directors 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.
8.3 Expenses of distribution with respect to the Class A shares of
the Fund include, among others:
(a) amounts paid to Prudential Securities for performing
services under a selected dealer agreement between
Prudential Securities and the Distributor for sale of Class
A shares of the Fund, including sales commissions and
trailer commissions paid to, or on account of, account
executives and indirect and overhead costs associated with
distribution activities, including central office and branch
expenses;
(b) amounts paid to Prusec for performing services under a
selected dealer agreement between Prusec and the Distributor
for sale of Class A shares of the Fund, including sales
commissions and trailer commissions paid to, or on account
of, agents and indirect and overhead costs associated with
distribution activities;
(c) sales commissions and trailer commissions paid to, or on
account of, broker-dealers and financial institutions (other
than Prudential Securities and Prusec) which have entered
into selected dealer agreements with the Distributor with
respect to Class A shares of the Fund.
(d) amounts paid to, or an account of, account executives of
Prudential Securities, Prusec,
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or of other broker-dealers or financial institutions for
personal service and/or the maintenance of shareholder
accounts; and
(e) advertising for the Fund in various forms through any
available medium, including the cost of printing and mailing
Fund Prospectuses, and periodic financial reports and sales
literature to persons other than current shareholders of the
Fund.
Indirect and overhead costs referred to in clauses (a) and (b) of the
foregoing sentence include (i) lease expenses, (ii) salaries and benefits of
personnel including operations and sales support personnel, (iii) utility
expenses, (iv) communications expenses, (v) sales promotion expenses, (vi)
expenses of postage, stationery and supplies and (vii) general overhead.
Section 9. ALLOCATION OF EXPENSES
9.1 The Fund shall bear all costs and expenses of the continuous
offering of its Class A shares, including fees and disbursements of its counsel
and auditors, in connection with the preparation and filing of any required
Registration Statements and/or Prospectuses under the Investment Company Act or
the Securities Act, and preparing and mailing annual and periodic reports and
proxy materials to shareholders (including but not limited to the expense of
setting in type any such Registration Statements, Prospectuses, annual or
periodic reports or proxy materials). The Fund shall also bear the cost of
expenses of qualification of the Class A shares for sale, and, if necessary or
advisable in connection therewith, of qualifying the Fund as a broker or dealer,
in such states of the United States or other jurisdictions as shall be selected
by the Fund and the Distributor pursuant to Section 5.4 hereof and the cost and
expense payable to each such state for continuing qualification therein until
the Fund decides to discontinue such qualification pursuant to Section 5.4
hereof. As set forth in Section 8 above, the Fund shall also bear the expenses
it assumes pursuant to the Plan with respect to Class A shares, so long as the
Plan is in effect.
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
counsel fees incurred in connection therewith) which the Distributor, its
officers, directors or any such controlling person may incur under the
Securities Act, or under common law or
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otherwise, arising out of or based upon any untrue statement of a material fact
contained in the Registration Statement or Prospectus or arising out of or based
upon any alleged omission to state a material fact required to be stated in
either thereof or necessary to make the statements in either thereof not
misleading, except insofar as such claims, demands, liabilities or expenses
arise out of or are based upon any such untrue statement or omission or alleged
untrue statement or omission made in reliance upon and in conformity with
information furnished in writing by the Distributor to the Fund for use in the
Registration Statement or Prospectus; provided, however, that this indemnity
agreement shall not inure to the benefit of any such officer, director, trustee
or controlling person unless a court of competent jurisdiction shall determine
in a final decision on the merits, that the person to be indemnified was not
liable by reason of willful misfeasance, bad faith or gross negligence in the
performance of its duties, or by reason of its reckless disregard of its
obligations under this Agreement (disabling conduct), or, in the absence of such
a decision, a reasonable determination, based upon a review of the facts, that
the indemnified person was not liable by reason of disabling conduct, by (a) a
vote of a majority of a quorum of directors or trustees who are neither
"interested persons" of the Fund as defined in Section 2(a)(19) of the
Investment Company Act nor parties to the proceeding, or (b) an independent
legal counsel in a written opinion. The Fund's agreement to indemnify the
Distributor, its officers and directors or trustees and any such controlling
person as aforesaid is expressly conditioned upon the Fund's being promptly
notified of any action brought against the Distributor, its officers or
directors or trustees, 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 Class A shares.
10.2 The Distributor agrees to indemnify, defend and hold the Fund,
its officers and Directors and any person who controls the Fund, if any, within
the meaning of Section 15 of the Securities Act, free and harmless from and
against any and all claims, demands, liabilities and expenses (including the
cost of investigating or defending against such claims, demands or liabilities
and any counsel fees incurred in connection therewith) which the Fund, its
officers and Directors or any such controlling person may incur under the
Securities Act or under common law or otherwise, but only to the extent that
such liability or expense incurred by the Fund, its Directors or officers or
such controlling person resulting from such claims or demands shall arise out of
or be based upon any alleged untrue statement of a material fact contained in
information furnished in writing by the Distributor to the Fund for use in the
Registration Statement or Prospectus or shall arise out of or be based upon any
alleged omission to state
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a material fact in connection with such information required to be stated in the
Registration Statement or Prospectus or necessary to make such information not
misleading. The Distributor's agreement to indemnify the Fund, its officers and
Directors and any such controlling person as aforesaid, is expressly conditioned
upon the Distributor's being promptly notified of any action brought against the
Fund, its officers and Directors or any such controlling person, such
notification being given to the Distributor at its principal business office.
Section 11. DURATION AND TERMINATION OF THIS AGREEMENT
11.1 This Agreement shall become effective as of the date first above
written and shall remain in force for two years from the date hereof and
thereafter, but only so long as such continuance is specifically approved at
least annually by (a) the Board of Directors of the Fund, or by the vote of a
majority of the outstanding voting securities of the Class A shares of the Fund,
and (b) by the vote of a majority of those Directors who are not parties to this
Agreement or interested persons of any such parties and who have no direct or
indirect financial interest in this Agreement or in the operation of the Fund's
Plan or in any agreement related thereto (Rule 12b-1 Directors), cast in person
at a meeting called for the purpose of voting upon such approval.
11.2 This Agreement may be terminated at any time, without the
payment of any penalty, by a majority of the Rule 12b-1 Directors or by vote of
a majority of the outstanding voting securities of the Class A shares 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 Directors of the Fund, or by the vote
of a majority of the outstanding voting securities of the Class A shares of the
Fund, and (b) by the vote of a majority of the Rule 12b-1 Directors cast in
person at a meeting called for the purpose of voting on such amendment.
Section 13. GOVERNING LAW
The provisions of this Agreement shall be construed and interpreted in
accordance with the laws of the State of New York as at the time in effect and
the applicable provisions of the
9
<PAGE>
Investment Company Act. To the extent that the applicable law of the State of
New York, or any of the provisions herein, conflict with the applicable
provisions of the Investment Company Act, the latter shall control.
*[Section 14. LIABILITIES OF THE FUND
The name "Prudential ___________ Trust" is the designation of the
Trustees under a Declaration of Trust dated ______, 19__ and all persons dealing
with the Fund must look solely to the property of the Fund for the enforcement
of any claims against the Fund, and neither the Trustees, officers, agents of
shareholders assume any personal liability for obligations entered into on
behalf of the Fund.]
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year above written.
Prudential Mutual Fund
Distributors, Inc.
By: ________________________
_______________________
(Title)
Prudential______________Fund
By: _______________________
(Name)
(Title)
*For Massachusetts Business Trusts only.
[mc]cla-comp.agr
10
<PAGE>
EXHIBIT 6(f)
PRUDENTIAL ___________ FUND
Form of
Distribution Agreement
(CLASS B SHARES)
Agreement made as of ______ __, 199_, between Prudential ________
Fund, [a Maryland Corporation/Massachusetts Business Trust] (the Fund) and
Prudential Securities Incorporated, a Delaware Corporation (the Distributor).
WITNESSETH
WHEREAS, the Fund is registered under the Investment Company Act of
1940, as amended (the Investment Company Act), as a diversified, open-end,
management investment company and it is in the interest of the Fund to offer its
Class B shares for sale continuously;
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 Class B
shares from and after the date hereof in order to promote the growth of the Fund
and facilitate the distribution of its Class B shares; and
WHEREAS, the Fund has adopted a distribution and service plan pursuant
to Rule 12b-1 under the Investment Company Act (the Plan) authorizing payments
by the Fund to the Distributor with respect to the distribution of Class B
shares of the Fund and the maintenance of Class B 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 Class B shares of the Fund to sell Class B shares to the
public and the Distributor hereby accepts such appointment and agrees to act
hereunder. The Fund hereby agrees during the term of this Agreement to sell
Class B shares of the Fund to the Distributor on the terms and conditions set
forth below.
1
<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 Class B shares,
except that:
2.1 The exclusive rights granted to the Distributor to purchase Class
B shares from the Fund shall not apply to Class B 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 Class B shares issued by
the Fund pursuant to reinvestment of dividends or capital gains distributions.
2.3 Such exclusive rights shall not apply to Class B 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 (the Securities Act), and the Investment Company Act, as
such Registration Statement is amended from time to time.
Section 3. PURCHASE OF CLASS B SHARES FROM THE FUND
3.1 The Distributor shall have the right to buy from the Fund the
Class B shares needed, but not more than the Class B shares needed (except for
clerical errors in transmission) to fill unconditional orders for Class B shares
placed with the Distributor by investors or registered and qualified securities
dealers and other financial institutions (selected dealers). The price which
the Distributor shall pay for the Class B shares so purchased from the Fund
shall be the net asset value, determined as set forth in the Prospectus.
3.2 The Class B shares are to be resold 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 its Class B
shares at times when redemption is suspended pursuant
2
<PAGE>
to the conditions in Section 4.3 hereof or at such other times as may be
determined by the Board of Directors. The Fund shall also have the right to
suspend the sale of its Class B shares if a banking moratorium shall have been
declared by federal or New York authorities.
3.4 The Fund, or any agent of the Fund designated in writing by the
Fund, shall be promptly advised of all purchase orders for Class B 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 Class B 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 Class B 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 CLASS B SHARES BY THE FUND
4.1 Any of the outstanding Class B shares may be tendered for
redemption at any time, and the Fund agrees to repurchase or redeem the Class B
shares so tendered in accordance with its Articles of Incorporation as amended
from time to time, and in accordance with the applicable provisions of the
Prospectus. The price to be paid to redeem or repurchase the Class B 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 Class B shares
shall be paid by the Fund as follows: (a) any applicable contingent deferred
sales charge shall be paid to the Distributor and (b) 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.
4.3 Redemption of Class B 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,
3
<PAGE>
so permits.
Section 5. DUTIES OF THE FUND
5.1 Subject to the possible suspension of the sale of Class B shares
as provided herein, the Fund agrees to sell its Class B shares so long as it has
Class B shares available.
5.2 The Fund shall furnish the Distributor copies of all information,
financial statements and other papers which the Distributor may reasonably
request for use in connection with the distribution of Class B 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 of Directors and the shareholders, all necessary
action to fix the number of authorized Class B shares and such steps as may be
necessary to register the same under the Securities Act, to the end that there
will be available for sale such number of Class B shares as the Distributor
reasonably may expect to sell. The Fund agrees to file from time to time such
amendments, reports and other documents as may be necessary in order that there
will be no untrue statement of a material fact in the Registration Statement, or
necessary in order that there will be no omission to state a material fact in
the Registration Statement which omission would make the statements therein
misleading.
5.4 The Fund shall use its best efforts to qualify and maintain the
qualification of any appropriate number of its Class B shares for sales under
the securities laws of such states as the Distributor and the Fund may approve;
provided that the Fund shall not be required to amend its Articles of
Incorporation or By-Laws to comply with the laws of any state, to maintain an
office in any state, to change the terms of the offering of its Class B 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 Class
B shares. Any such qualification may be withheld, terminated or withdrawn by
the Fund at any time in its discretion. As provided in Section 9.1 hereof, the
expense of qualification and maintenance of qualification shall be borne by the
Fund. The Distributor shall furnish such information and other material
relating to its affairs and activities as may be required by the Fund in
connection with such qualifications.
4
<PAGE>
Section 6. DUTIES OF THE DISTRIBUTOR
6.1 The Distributor shall devote reasonable time and effort to effect
sales of Class B shares of the Fund, but shall not be obligated to sell any
specific number of Class B shares. Sales of the Class B 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 Class B 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 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 Class B shares, provided
that the Fund shall approve the forms of such agreements. Within the United
States, the Distributor shall offer and sell Class B shares only to such
selected dealers as are members in good standing of the NASD. Class B 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
The Distributor shall receive and may retain any contingent deferred
sales charge which is imposed with respect to repurchases and redemptions of
Class B shares as set forth in the Prospectus, subject to the limitations of
Article III, Section 26 of the NASD Rules of Fair Practice. Payment of these
amounts to the Distributor is not contingent upon the adoption or continuation
of the Plan.
Section 8. PAYMENT OF THE DISTRIBUTOR UNDER THE PLAN
8.1 The Fund shall pay to the Distributor as compensation for
services under the Distribution and Service Plan and this Agreement a fee of 1%
(including an asset-based sales charge of .75 of 1% and a service fee of .25 of
1%) per annum of
5
<PAGE>
the average daily net assets of the Class B shares of the Fund. Amounts payable
under the Plan shall be accrued daily and paid monthly or at such other
intervals as Directors/Trustees may determine. Amounts payable under the Plan
shall be subject to the limitations of Article III, Section 26 of the NASD Rules
of Fair Practice.
8.2 So long as the Plan or any amendment thereto is in effect, the
Distributor shall inform the Board of Directors of the commissions (including
trailer commissions) and account servicing fees to be paid by the Distributor to
account executives of the Distributor and to broker-dealers and financial
institutions which have selected dealer agreements with the Distributor. So
long as the Plan (or any amendment thereto) is in effect, at the request of the
Board of Directors 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.
8.3 Expenses of distribution with respect to the Class B shares of
the Fund include, among others:
(a) sales commissions (including trailer commissions) paid to,
or on account of, account executives of the Distributor;
(b) indirect and overhead costs of the Distributor associated
with performance of distribution activities, including
central office and branch expenses;
(c) amounts paid to Prusec for performing services under a
selected dealer agreement between Prusec and the Distributor
for sale of Class B shares of the Fund, including sales
commissions and trailer commissions paid to, or on account
of, agents and indirect and overhead costs associated with
distribution activities;
(d) sales commissions (including trailer commissions) paid to,
or on account of, broker-dealers and financial institutions
(other than Prusec) which have entered into selected dealer
agreements with the Distributor with respect to Class B
shares of the Fund;
(e) amounts paid to, or an account of, account executives of the
Distributor or of other broker-dealers or financial
institutions for
6
<PAGE>
personal service and/or the maintenance of shareholder
accounts; and
(f) advertising for the Fund in various forms through any
available medium, including the cost of printing and mailing
Fund Prospectuses, and periodic financial reports and sales
literature to persons other than current shareholders of the
Fund.
Indirect and overhead costs referred to in clauses (b) and (c) of the
foregoing sentence include (i) lease expenses, (ii) salaries and benefits of
personnel including operations and sales support personnel, (iii) utility
expenses, (iv) communications expenses, (v) sales promotion expenses, (vi)
expenses of postage, stationery and supplies and (vii) general overhead.
Section 9. ALLOCATION OF EXPENSES
9.1 The Fund shall bear all costs and expenses of the continuous
offering of its Class B shares, including fees and disbursements of its counsel
and auditors, in connection with the preparation and filing of any required
Registration Statements and/or Prospectuses under the Investment Company Act or
the Securities Act, and preparing and mailing annual and periodic reports and
proxy materials to shareholders (including but not limited to the expense of
setting in type any such Registration Statements, Prospectuses, annual or
periodic reports or proxy materials). The Fund shall also bear the cost of
expenses of qualification of the Class B shares for sale, and, if necessary or
advisable in connection therewith, of qualifying the Fund as a broker or dealer,
in such states of the United States or other jurisdictions as shall be selected
by the Fund and the Distributor pursuant to Section 5.4 hereof and the cost and
expense payable to each such state for continuing qualification therein until
the Fund decides to discontinue such qualification pursuant to Section 5.4
hereof. As set forth in Section 8 above, the Fund shall also bear the expenses
it assumes pursuant to the Plan with respect to Class B shares, so long as the
Plan is in effect.
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
counsel fees incurred in connection therewith) which the Distributor, its
officers, Directors or any such controlling person may incur under the
Securities Act, or under common law or otherwise, arising out of or based upon
any untrue statement of a
7
<PAGE>
material fact contained in the Registration Statement or Prospectus or arising
out of or based upon any alleged omission to state a material fact required to
be stated in either thereof or necessary to make the statements in either
thereof not misleading, except insofar as such claims, demands, liabilities or
expenses arise out of or are based upon any such untrue statement or omission or
alleged untrue statement or omission made in reliance upon and in conformity
with information furnished in writing by the Distributor to the Fund for use in
the Registration Statement or Prospectus; provided, however, that this indemnity
agreement shall not inure to the benefit of any such officer, Director or
controlling person unless a court of competent jurisdiction shall determine in a
final decision on the merits, that the person to be indemnified was not liable
by reason of willful misfeasance, bad faith or gross negligence in the
performance of its duties, or by reason of its reckless disregard of its
obligations under this Agreement (disabling conduct), or, in the absence of such
a decision, a reasonable determination, based upon a review of the facts, that
the indemnified person was not liable by reason of disabling conduct, by (a) a
vote of a majority of a quorum of Directors who are neither "interested persons"
of the Fund as defined in Section 2(a)(19) of the Investment Company Act nor
parties to the proceeding, or (b) an independent legal counsel in a written
opinion. The Fund's agreement to indemnify the Distributor, its officers and
Directors and any such controlling person as aforesaid is expressly conditioned
upon the Fund's being promptly notified of any action brought against the
Distributor, its officers or Directors, or any such controlling person, such
notification to be given in writing 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 Class B shares.
10.2 The Distributor agrees to indemnify, defend and hold the Fund,
its officers and Directors and any person who controls the Fund, if any, within
the meaning of Section 15 of the Securities Act, free and harmless from and
against any and all claims, demands, liabilities and expenses (including the
cost of investigating or defending against such claims, demands or liabilities
and any counsel fees incurred in connection therewith) which the Fund, its
officers and Directors or any such controlling person may incur under the
Securities Act or under common law or otherwise, but only to the extent that
such liability or expense incurred by the Fund, its Directors or officers or
such controlling person resulting from such claims or demands shall arise out of
or be based upon any alleged untrue statement of a material fact contained in
information furnished in writing by the Distributor to the Fund for use in the
Registration Statement or Prospectus or shall arise out of or be based upon any
alleged omission to state a material fact in connection with such information
required to be stated in the Registration Statement or Prospectus or necessary
to
8
<PAGE>
make such information not misleading. The Distributor's agreement to indemnify
the Fund, its officers and Directors and any such controlling person as
aforesaid, is expressly conditioned upon the Distributor's being promptly
notified of any action brought against the Fund, its officers and Directors or
any such controlling person, such notification to be given to the Distributor in
writing 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 Directors of the Fund, or by the vote of a
majority of the outstanding voting securities of the Class B shares of the Fund,
and (b) by the vote of a majority of those Directors who are not parties to this
Agreement or interested persons of any such parties and who have no direct or
indirect financial interest in this Agreement or in the operation of the Fund's
Plan or in any agreement related thereto (Rule 12b-1 Directors), cast in person
at a meeting called for the purpose of voting upon such approval.
11.2 This Agreement may be terminated at any time, without the
payment of any penalty, by a majority of the Rule 12b-1 Directors or by vote of
a majority of the outstanding voting securities of the Class B shares 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 Directors of the Fund, or by the vote
of a majority of the outstanding voting securities of the Class B shares of the
Fund, and (b) by the vote of a majority of the Rule 12b-1 Board of Directors
cast in person at a meeting called for the purpose of voting on such amendment.
Section 13. GOVERNING LAW
The provisions of this Agreement shall be construed and interpreted in
accordance with the laws of the State of New York as at the time in effect and
the applicable provisions of the Investment Company Act. To the extent that the
applicable law of the State of New York, or any of the provisions herein,
conflict
9
<PAGE>
with the applicable provisions of the Investment Company Act, the latter shall
control.
*[Section 14. LIABILITIES OF THE FUND
The name "Prudential ___________ Trust" is the designation of the
Trustees under a Declaration of Trust dated ______, 19__ and all persons dealing
with the Fund must look solely to the property of the Fund for the enforcement
of any claims against the Fund, and neither the Trustees, officers, agents of
shareholders assume any personal liability for obligations entered into on
behalf of the Fund.]
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year above written.
Prudential Securities
Incorporated
By: ________________________
________________________
(Title)
Prudential ________Fund
By: _______________________
(Name)
(Title)
*For Massachusetts Business Trusts only.
[mc]clb-comp.agr
10
<PAGE>
EXHIBIT 6(g)
PRUDENTIAL ___________ FUND
Form of
Distribution Agreement
(CLASS C SHARES)
Agreement made as of ______ __, 199_, between Prudential ________
Fund, [a Maryland Corporation/Massachusetts Business Trust] (the Fund) and
Prudential Securities Incorporated, a Delaware Corporation (the Distributor).
WITNESSETH
WHEREAS, the Fund is registered under the Investment Company Act of
1940, as amended (the Investment Company Act), as a diversified, open-end,
management investment company and it is in the interest of the Fund to offer its
Class C shares for sale continuously;
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 Class C
shares from and after the date hereof in order to promote the growth of the Fund
and facilitate the distribution of its Class C shares; and
WHEREAS, the Fund has adopted a distribution and service plan pursuant
to Rule 12b-1 under the Investment Company Act (the Plan) authorizing payments
by the Fund to the Distributor with respect to the distribution of Class C
shares of the Fund and the maintenance of Class C 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 Class C shares of the Fund to sell Class C shares to the
public and the Distributor hereby accepts such appointment and agrees to act
hereunder. The Fund hereby agrees during the term of this Agreement to sell
Class C shares of the Fund to the Distributor on the terms and conditions set
forth below.
1
<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 Class C shares,
except that:
2.1 The exclusive rights granted to the Distributor to purchase Class
C shares from the Fund shall not apply to Class C 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 Class C shares issued by
the Fund pursuant to reinvestment of dividends or capital gains distributions.
2.3 Such exclusive rights shall not apply to Class C 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 (the Securities Act), and the Investment Company Act, as
such Registration Statement is amended from time to time.
Section 3. PURCHASE OF CLASS C SHARES FROM THE FUND
3.1 The Distributor shall have the right to buy from the Fund the
Class C shares needed, but not more than the Class C shares needed (except for
clerical errors in transmission) to fill unconditional orders for Class C shares
placed with the Distributor by investors or registered and qualified securities
dealers and other financial institutions (selected dealers). The price which
the Distributor shall pay for the Class C shares so purchased from the Fund
shall be the net asset value, determined as set forth in the Prospectus.
3.2 The Class C shares are to be resold 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 its Class C
shares at times when redemption is suspended pursuant
2
<PAGE>
to the conditions in Section 4.3 hereof or at such other times as may be
determined by the Board of Directors. The Fund shall also have the right to
suspend the sale of its Class C shares if a banking moratorium shall have been
declared by federal or New York authorities.
3.4 The Fund, or any agent of the Fund designated in writing by the
Fund, shall be promptly advised of all purchase orders for Class C 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 Class C 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 Class C 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 CLASS C SHARES BY THE FUND
4.1 Any of the outstanding Class C shares may be tendered for
redemption at any time and the Fund agrees to repurchase or redeem the Class C
shares so tendered in accordance with its Articles of Incorporation as amended
from time to time, and in accordance with the applicable provisions of the
Prospectus. The price to be paid to redeem or repurchase the Class C 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 Class C shares
shall be paid by the Fund as follows: (a) any applicable contingent deferred
sales charge shall be paid to the Distributor and (b) 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.
4.3 Redemption of Class C 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,
3
<PAGE>
so permits.
Section 5. DUTIES OF THE FUND
5.1 Subject to the possible suspension of the sale of Class C shares
as provided herein, the Fund agrees to sell its Class C shares so long as it has
Class C shares available.
5.2 The Fund shall furnish the Distributor copies of all information,
financial statements and other papers which the Distributor may reasonably
request for use in connection with the distribution of Class C 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 of Directors and the shareholders, all necessary
action to fix the number of authorized Class C shares and such steps as may be
necessary to register the same under the Securities Act, to the end that there
will be available for sale such number of Class C shares as the Distributor
reasonably may expect to sell. The Fund agrees to file from time to time such
amendments, reports and other documents as may be necessary in order that there
will be no untrue statement of a material fact in the Registration Statement, or
necessary in order that there will be no omission to state a material fact in
the Registration Statement which omission would make the statements therein
misleading.
5.4 The Fund shall use its best efforts to qualify and maintain the
qualification of any appropriate number of its Class C shares for sales under
the securities laws of such states as the Distributor and the Fund may approve;
provided that the Fund shall not be required to amend its Articles of
Incorporation or By-Laws to comply with the laws of any state, to maintain an
office in any state, to change the terms of the offering of its Class C 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 Class
C shares. Any such qualification may be withheld, terminated or withdrawn by
the Fund at any time in its discretion. As provided in Section 9.1 hereof, the
expense of qualification and maintenance of qualification shall be borne by the
Fund. The Distributor shall furnish such information and other material
relating to its affairs and activities as may be required by the Fund in
connection with such qualifications.
4
<PAGE>
Section 6. DUTIES OF THE DISTRIBUTOR
6.1 The Distributor shall devote reasonable time and effort to effect
sales of Class C shares of the Fund, but shall not be obligated to sell any
specific number of Class C shares. Sales of the Class C 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 Class C 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 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 Class C shares, provided
that the Fund shall approve the forms of such agreements. Within the United
States, the Distributor shall offer and sell Class C shares only to such
selected dealers as are members in good standing of the NASD. Class C 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
The Distributor shall receive and may retain any contingent deferred
sales charge which is imposed with respect to repurchases and redemptions of
Class C shares as set forth in the Prospectus, subject to the limitations of
Article III, Section 26 of the NASD Rules of Fair Practice. Payment of these
amounts to the Distributor is not contingent upon the adoption or continuation
of the Plan.
Section 8. PAYMENT OF THE DISTRIBUTOR UNDER THE PLAN
8.1 The Fund shall pay to the Distributor as compensation for
services under the Distribution and Service Plan and this Agreement a fee of 1%
(including an asset-based sales charge of .75 of 1% and a service fee of .25 of
1%) per annum of
5
<PAGE>
the average daily net assets of the Class C shares of the Fund. Amounts payable
under the Plan shall be accrued daily and paid monthly or at such other
intervals as Directors/Trustees may determine. Amounts payable under the Plan
shall be subject to the limitations of Article III, Section 26 of the NASD Rules
of Fair Practice.
8.2 So long as the Plan or any amendment thereto is in effect, the
Distributor shall inform the Board of Directors of the commissions (including
trailer commissions) and account servicing fees to be paid by the Distributor to
account executives of the Distributor and to broker-dealers and financial
institutions which have selected dealer agreements with the Distributor. So
long as the Plan (or any amendment thereto) is in effect, at the request of the
Board of Directors 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.
8.3 Expenses of distribution with respect to the Class C shares of
the Fund include, among others:
(a) sales commissions (including trailer commissions) paid to,
or on account of, account executives of the Distributor;
(b) indirect and overhead costs of the Distributor associated
with performance of distribution activities, including
central office and branch expenses;
(c) amounts paid to Prusec for performing services under a
selected dealer agreement between Prusec and the Distributor
for sale of Class C shares of the Fund, including sales
commissions and trailer commissions paid to, or on account
of, agents and indirect and overhead costs associated with
distribution activities;
(d) sales commissions (including trailer commissions) paid to,
or on account of, broker-dealers and financial institutions
(other than Prusec) which have entered into selected dealer
agreements with the Distributor with respect to Class C
shares of the Fund;
(e) amounts paid to, or an account of, account executives of the
Distributor or of other broker-dealers or financial
institutions for
6
<PAGE>
personal service and/or the maintenance of shareholder
accounts; and
(f) advertising for the Fund in various forms through any
available medium, including the cost of printing and mailing
Fund Prospectuses, and periodic financial reports and sales
literature to persons other than current shareholders of the
Fund.
Indirect and overhead costs referred to in clauses (b) and (c) of the
foregoing sentence include (i) lease expenses, (ii) salaries and benefits of
personnel including operations and sales support personnel, (iii) utility
expenses, (iv) communications expenses, (v) sales promotion expenses, (vi)
expenses of postage, stationery and supplies and (vii) general overhead.
Section 9. ALLOCATION OF EXPENSES
9.1 The Fund shall bear all costs and expenses of the continuous
offering of its Class C shares, including fees and disbursements of its counsel
and auditors, in connection with the preparation and filing of any required
Registration Statements and/or Prospectuses under the Investment Company Act or
the Securities Act, and preparing and mailing annual and periodic reports and
proxy materials to shareholders (including but not limited to the expense of
setting in type any such Registration Statements, Prospectuses, annual or
periodic reports or proxy materials). The Fund shall also bear the cost of
expenses of qualification of the Class C shares for sale, and, if necessary or
advisable in connection therewith, of qualifying the Fund as a broker or dealer,
in such states of the United States or other jurisdictions as shall be selected
by the Fund and the Distributor pursuant to Section 5.4 hereof and the cost and
expense payable to each such state for continuing qualification therein until
the Fund decides to discontinue such qualification pursuant to Section 5.4
hereof. As set forth in Section 8 above, the Fund shall also bear the expenses
it assumes pursuant to the Plan with respect to Class C shares, so long as the
Plan is in effect.
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
counsel fees incurred in connection therewith) which the Distributor, its
officers, Directors or any such controlling person may incur under the
Securities Act, or under common law or otherwise, arising out of or based upon
any untrue statement of a
7
<PAGE>
material fact contained in the Registration Statement or Prospectus or arising
out of or based upon any alleged omission to state a material fact required to
be stated in either thereof or necessary to make the statements in either
thereof not misleading, except insofar as such claims, demands, liabilities or
expenses arise out of or are based upon any such untrue statement or omission or
alleged untrue statement or omission made in reliance upon and in conformity
with information furnished in writing by the Distributor to the Fund for use in
the Registration Statement or Prospectus; provided, however, that this indemnity
agreement shall not inure to the benefit of any such officer, Director or
controlling person unless a court of competent jurisdiction shall determine in a
final decision on the merits, that the person to be indemnified was not liable
by reason of willful misfeasance, bad faith or gross negligence in the
performance of its duties, or by reason of its reckless disregard of its
obligations under this Agreement (disabling conduct), or, in the absence of such
a decision, a reasonable determination, based upon a review of the facts, that
the indemnified person was not liable by reason of disabling conduct, by (a) a
vote of a majority of a quorum of Directors who are neither "interested persons"
of the Fund as defined in Section 2(a)(19) of the Investment Company Act nor
parties to the proceeding, or (b) an independent legal counsel in a written
opinion. The Fund's agreement to indemnify the Distributor, its officers and
Directors and any such controlling person as aforesaid is expressly conditioned
upon the Fund's being promptly notified of any action brought against the
Distributor, its officers or Directors, or any such controlling person, such
notification to be given in writing 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 Class C shares.
10.2 The Distributor agrees to indemnify, defend and hold the Fund,
its officers and Directors and any person who controls the Fund, if any, within
the meaning of Section 15 of the Securities Act, free and harmless from and
against any and all claims, demands, liabilities and expenses (including the
cost of investigating or defending against such claims, demands or liabilities
and any counsel fees incurred in connection therewith) which the Fund, its
officers and Directors or any such controlling person may incur under the
Securities Act or under common law or otherwise, but only to the extent that
such liability or expense incurred by the Fund, its Directors or officers or
such controlling person resulting from such claims or demands shall arise out of
or be based upon any alleged untrue statement of a material fact contained in
information furnished in writing by the Distributor to the Fund for use in the
Registration Statement or Prospectus or shall arise out of or be based upon any
alleged omission to state a material fact in connection with such information
required to be stated in the Registration Statement or Prospectus or necessary
to
8
<PAGE>
make such information not misleading. The Distributor's agreement to indemnify
the Fund, its officers and Directors and any such controlling person as
aforesaid, is expressly conditioned upon the Distributor's being promptly
notified of any action brought against the Fund, its officers and Directors or
any such controlling person, such notification to be given to the Distributor in
writing 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 Directors of the Fund, or by the vote of a
majority of the outstanding voting securities of the Class C shares of the Fund,
and (b) by the vote of a majority of those Directors who are not parties to this
Agreement or interested persons of any such parties and who have no direct or
indirect financial interest in this Agreement or in the operation of the Fund's
Plan or in any agreement related thereto (Rule 12b-1 Directors), cast in person
at a meeting called for the purpose of voting upon such approval.
11.2 This Agreement may be terminated at any time, without the
payment of any penalty, by a majority of the Rule 12b-1 Directors or by vote of
a majority of the outstanding voting securities of the Class C shares 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 Directors of the Fund, or by the vote
of a majority of the outstanding voting securities of the Class C shares of the
Fund, and (b) by the vote of a majority of the Rule 12b-1 Board of Directors
cast in person at a meeting called for the purpose of voting on such amendment.
Section 13. GOVERNING LAW
The provisions of this Agreement shall be construed and interpreted in
accordance with the laws of the State of New York as at the time in effect and
the applicable provisions of the Investment Company Act. To the extent that the
applicable law of the State of New York, or any of the provisions herein,
conflict
9
<PAGE>
with the applicable provisions of the Investment Company Act, the latter shall
control.
*[Section 14. LIABILITIES OF THE FUND
The name "Prudential ___________ Trust" is the designation of the
Trustees under a Declaration of Trust dated ______, 19__ and all persons dealing
with the Fund must look solely to the property of the Fund for the enforcement
of any claims against the Fund, and neither the Trustees, officers, agents of
shareholders assume any personal liability for obligations entered into on
behalf of the Fund.]
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year above written.
Prudential Securities
Incorporated
By: ________________________
________________________
(Title)
Prudential ________Fund
By: _______________________
(Name)
(Title)
*For Massachusetts Business Trusts only.
[mc]clb-comp.agr
10
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Statement of Additional Information
constituting part of this Post-Effective Amendment No. 18 to the registration
statement on Form N-1A (the "Registration Statement") of our report dated
February 9, 1994 relating to the financial statements and financial highlights
of Prudential GNMA Fund, Inc., which appears in such Statement of Additional
Information, and to the incorporation by reference of our report into the
Prospectus which constitutes part of this Registration Statement. We also
consent to the reference to us under the heading "Custodian, Transfer and
Disbursing Agent and Independent Accountants" in such Statement of Additional
Information and to the reference to us under the heading "Financial Highlights"
in such Prospectus.
PRICE WATERHOUSE
1177 Avenue of the Americas
New York, New York 10036
May 6, 1994
<PAGE>
EXHIBIT 15(d)
PRUDENTIAL ________ FUND
Form of
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 Article III, Section 26 of
the Rules of Fair Practice of the National Association of Securities Dealers,
Inc. (NASD) has been adopted by Prudential __________ Fund (the Fund) and by
Prudential Mutual Fund Distributors, Inc., 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 or Trustees of the Fund, including a
majority of those Directors or 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 or 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
<PAGE>
likelihood that adoption of this Plan will benefit the Fund and its
shareholders. Expenditures under this Plan by the Fund for Distribution
Activities (defined below) are primarily intended to result in the sale of Class
A shares of the Fund within the meaning of paragraph (a)(2) of Rule 12b-1
promulgated under the 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
distribution networks of Prudential Securities Incorporated (Prudential
Securities) and Pruco Securities Corporation (Prusec), 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. Services provided and activities undertaken to distribute Class A
shares of the Fund are referred to herein as "Distribution Activities."
2
<PAGE>
2. PAYMENT OF SERVICE FEE
The Fund shall pay to the Distributor as compensation for providing
personal service and/or maintaining shareholder accounts a service fee of .25 of
1% per annum of the average daily net assets of the Class A shares (service
fee). The Fund shall calculate and accrue daily amounts payable by the Class A
shares of the Fund 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 Article III, Section 26 of the NASD Rules of
Fair Practice.
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
3
<PAGE>
over the Fund's fiscal year or such other allocation method approved by the
Board of Directors or Trustees. The allocation of distribution expenses among
classes will be subject to the review of the Board of Directors or Trustees.
The Distributor shall spend such amounts as it deems appropriate on
Distribution Activities which include, among others:
(a) amounts paid to Prudential Securities for performing
services under a selected dealer agreement between
Prudential Securities and the Distributor for sale of Class
A shares of the Fund, including sales commissions and
trailer commissions paid to, or on account of, account
executives and indirect and overhead costs associated with
Distribution Activities, including central office and branch
expenses;
(b) amounts paid to Prusec for performing services under a
selected dealer agreement between Prusec and the Distributor
for sale of Class A shares of the Fund, including sales
commissions and trailer commissions paid to, or on account
of, agents and indirect and overhead costs associated with
Distribution Activities;
(c) 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
(d) sales commissions (including trailer commissions) paid to,
or on account of, broker-dealers and financial institutions
(other than Prudential Securities and Prusec) which have
entered into selected dealer agreements with the Distributor
with respect to shares of the Fund.
4
<PAGE>
4. QUARTERLY REPORTS; ADDITIONAL INFORMATION
An appropriate officer of the Fund will provide to the Board of Directors
or 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 or Trustees of the Fund such
additional information as the Board or Trustees shall from time to time
reasonably request, including information about Distribution Activities
undertaken or to be undertaken by the Distributor.
The Distributor will inform the Board of Directors or 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
5
<PAGE>
majority of the Board of Directors or Trustees of the Fund and a majority of the
Rule 12b-1 Directors or 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 or 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 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 or the Trustees of the Fund and a majority of the Rule 12b-1 Directors
or Trustees by votes cast in person at a meeting called for the purpose of
voting on the Plan.
8. RULE 12b-1 DIRECTORS OR TRUSTEES
While the Plan is in effect, the selection and nomination of the Rule 12b-1
Directors or Trustees shall be committed to the discretion of the Rule 12b-1
Directors or Trustees.
6
<PAGE>
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.
*[10. ENFORCEMENT OF CLAIMS.
The name "Prudential ___________ Trust" is the designation of the Trustees
under a Declaration of Trust dated ______, 19__ and all persons dealing with the
Fund must look solely to the property of the Fund for the enforcement of any
claims against the Fund, and neither the Trustees, officers, agents of
shareholders assume any personal liability for obligations entered into on
behalf of the Fund.]
Dated:
[mc]cla-comp.pln
7
<PAGE>
EXHIBIT 99.15(e)
PRUDENTIAL ________ FUND
Form of
Distribution and Service Plan
(CLASS B SHARES)
INTRODUCTION
The Distribution and Service Plan (the Plan) set forth below which is
designed to conform to the requirements of Rule 12b-1 under the Investment
Company Act of 1940 (the Investment Company Act) and Article III, Section 26 of
the Rules of Fair Practice of the National Association of Securities Dealers,
Inc. (NASD) has been adopted by Prudential __________ Fund, (the Fund) and by
Prudential Securities Incorporated (Prudential Securities), the Fund's
distributor (the Distributor).
The Fund has entered into a distribution agreement pursuant to which
the Fund will continue to employ the Distributor to distribute Class B shares
issued by the Fund (Class B shares). Under the Plan, the Fund wishes to pay to
the Distributor, as compensation for its services, a distribution and service
fee with respect to Class B shares.
A majority of the Board of Directors or Trustees of the Fund including a
majority who are not "interested persons" of the Fund (as defined in the
Investment Company Act) and who have no direct or indirect financial interest in
the operation of this Plan or any agreements related to it (the Rule 12b-1
Directors or 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 of this Plan will benefit the Fund and its
<PAGE>
shareholders. Expenditures under this Plan by the Fund for Distribution
Activities (defined below) are primarily intended to result in the sale of Class
B shares of the Fund within the meaning of paragraph (a)(2) of Rule 12b-1
promulgated under the Investment Company Act.
The purpose of the Plan is to create incentives to the Distributor
and/or other qualified broker-dealers and their account executives to provide
distribution assistance to their customers who are investors in the Fund, to
defray the costs and expenses associated with the preparation, printing and
distribution of prospectuses and sales literature and other promotional and
distribution activities and to provide for the servicing and maintenance of
shareholder accounts.
THE PLAN
The material aspects of the Plan are as follows:
1. DISTRIBUTION ACTIVITIES
The Fund shall engage the Distributor to distribute Class B shares of the
Fund and to service shareholder accounts using all of the facilities of the
Prudential Securities 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
Pruco Securities Corporation (Prusec). Services provided and activities
undertaken to distribute Class B shares of the Fund are referred to herein as
"Distribution Activities."
2
<PAGE>
2. PAYMENT OF SERVICE FEE
The Fund shall pay to the Distributor as compensation for providing
personal service and/or maintaining shareholder accounts a service fee of .25 of
1% per annum of the average daily net assets of the Class B shares (service
fee). The Fund shall calculate and accrue daily amounts payable by the Class B
shares of the Fund 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 of .75 of 1% per annum of the average daily net assets of the
Class B shares of the Fund for the performance of Distribution Activities. The
Fund shall calculate and accrue daily amounts payable by the Class B shares of
the Fund hereunder and shall pay such amounts monthly or at such other intervals
as the Board of Directors/Trustees may determine. Amounts payable under the
Plan shall be subject to the limitations of Article III, Section 26 of the NASD
Rules of Fair Practice.
Amounts paid to the Distributor by the Class B shares of the Fund will not
be used to pay the distribution expenses incurred with respect to any other
class of shares of the Fund except that distribution expenses attributable to
the Fund as a whole will be allocated to the Class B shares according to the
ratio of the sale of Class B shares to the total sales of the Fund's shares over
the Fund's fiscal year or such other allocation method approved by the Board of
Directors or Trustees. The allocation of distribution
3
<PAGE>
expenses among classes will be subject to the review of the Board of Directors
or Trustees.
The Distributor shall spend such amounts as it deems appropriate on
Distribution Activities which include, among others:
(a) sales commissions (including trailer commissions) paid to, or on
account of, account executives of the Distributor;
(b) indirect and overhead costs of the Distributor associated with
performance of Distribution Activities including central office and
branch expenses;
(c) amounts paid to Prusec for performing services under a selected
dealer agreement between Prusec and the Distributor for sale of Class
B shares of the Fund, including sales commissions and trailer
commissions paid to, or on account of, agents and indirect and
overhead costs associated with Distribution Activities;
(d) advertising for the Fund in various forms through any available
medium, including the cost of printing and mailing Fund prospectuses,
statements of additional information and periodic financial reports
and sales literature to persons other than current shareholders of the
Fund; and
(e) sales commissions (including trailer commissions) paid to, or on
account of, broker-dealers and other financial institutions (other
than Prusec) which have entered into selected dealer agreements with
the Distributor with respect to shares of the Fund.
4. QUARTERLY REPORTS; ADDITIONAL INFORMATION
An appropriate officer of the Fund will provide to the Board of Directors
or 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 or Trustees of
4
<PAGE>
the Fund such additional information as they shall from time to time reasonably
request, including information about Distribution Activities undertaken or to be
undertaken by the Distributor.
The Distributor will inform the Board of Directors or 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 other 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 B shares of the Fund.
If approved by a vote of a majority of the outstanding voting securities of
the Class B shares of the Fund, the Plan shall, unless earlier terminated in
accordance with its terms, continue in full force and effect thereafter for so
long as such continuance is specifically approved at least annually by a
majority of the Board of Directors or Trustees of the Fund and a majority of the
Rule 12b-1 Directors or 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 or Trustees, or by vote of a majority of the outstanding voting
securities (as defined in the Investment
5
<PAGE>
Company Act) of the Class B 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 vote of a majority of the outstanding voting securities (as
defined in the Investment Company Act) of the Class B shares of the Fund. All
material amendments of the Plan shall be approved by a majority of the Board of
Directors or Trustees of the Fund and a majority of the Rule 12b-1 Directors or
Trustees by votes cast in person at a meeting called for the purpose of voting
on the Plan.
8. RULE 12b-1 DIRECTORS OR TRUSTEES
While the Plan is in effect, the selection and nomination of the Rule 12b-1
Directors or Trustees shall be committed to the discretion of the Rule 12b-1
Directors or 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.
*[10. ENFORCEMENT OF CLAIMS.
The name "Prudential ___________ Trust" is the designation of the Trustees
under a Declaration of Trust dated ______, 19__ and all persons dealing with the
Fund must look solely to the property
6
<PAGE>
of the Fund for the enforcement of any claims against the Fund, and neither the
Trustees, officers, agents of shareholders assume any personal liability for
obligations entered into on behalf of the Fund.]
Dated:
[mc]clb-comp.pln
7
<PAGE>
EXHIBIT 15(f)
PRUDENTIAL ________ FUND
Form of
Distribution and Service Plan
(CLASS C SHARES)
INTRODUCTION
The Distribution and Service Plan (the Plan) set forth below which is
designed to conform to the requirements of Rule 12b-1 under the Investment
Company Act of 1940 (the Investment Company Act) and Article III, Section 26 of
the Rules of Fair Practice of the National Association of Securities Dealers,
Inc. (NASD) has been adopted by Prudential __________ Fund, (the Fund) and by
Prudential Securities Incorporated (Prudential Securities), the Fund's
distributor (the Distributor).
The Fund has entered into a distribution agreement pursuant to which
the Fund will continue to employ the Distributor to distribute Class C shares
issued by the Fund (Class C shares). Under the Plan, the Fund wishes to pay to
the Distributor, as compensation for its services, a distribution and service
fee with respect to Class C shares.
A majority of the Board of Directors or Trustees of the Fund including a
majority who are not "interested persons" of the Fund (as defined in the
Investment Company Act) and who have no direct or indirect financial interest in
the operation of this Plan or any agreements related to it (the Rule 12b-1
Directors or 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 of this Plan will benefit the Fund and its
<PAGE>
shareholders. Expenditures under this Plan by the Fund for Distribution
Activities (defined below) are primarily intended to result in the sale of Class
C shares of the Fund within the meaning of paragraph (a)(2) of Rule 12b-1
promulgated under the Investment Company Act.
The purpose of the Plan is to create incentives to the Distributor
and/or other qualified broker-dealers and their account executives to provide
distribution assistance to their customers who are investors in the Fund, to
defray the costs and expenses associated with the preparation, printing and
distribution of prospectuses and sales literature and other promotional and
distribution activities and to provide for the servicing and maintenance of
shareholder accounts.
THE PLAN
The material aspects of the Plan are as follows:
1. DISTRIBUTION ACTIVITIES
The Fund shall engage the Distributor to distribute Class C shares of the
Fund and to service shareholder accounts using all of the facilities of the
Prudential Securities 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
Pruco Securities Corporation (Prusec). Services provided and activities
undertaken to distribute Class C shares of the Fund are referred to herein as
"Distribution Activities."
2
<PAGE>
2. PAYMENT OF SERVICE FEE
The Fund shall pay to the Distributor as compensation for providing
personal service and/or maintaining shareholder accounts a service fee of .25 of
1% per annum of the average daily net assets of the Class C shares (service
fee). The Fund shall calculate and accrue daily amounts payable by the Class C
shares of the Fund 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 of .75 of 1% per annum of the average daily net assets of the
Class C shares of the Fund for the performance of Distribution Activities. The
Fund shall calculate and accrue daily amounts payable by the Class C shares of
the Fund hereunder and shall pay such amounts monthly or at such other intervals
as the Board of Directors/Trustees may determine. Amounts payable under the
Plan shall be subject to the limitations of Article III, Section 26 of the NASD
Rules of Fair Practice.
Amounts paid to the Distributor by the Class C shares of the Fund will not
be used to pay the distribution expenses incurred with respect to any other
class of shares of the Fund except that distribution expenses attributable to
the Fund as a whole will be allocated to the Class C shares according to the
ratio of the sale of Class C shares to the total sales of the Fund's shares over
the Fund's fiscal year or such other allocation method approved by the Board of
Directors or Trustees. The allocation of distribution
3
<PAGE>
expenses among classes will be subject to the review of the Board of Directors
or Trustees.
The Distributor shall spend such amounts as it deems appropriate on
Distribution Activities which include, among others:
(a) sales commissions (including trailer commissions) paid to, or on
account of, account executives of the Distributor;
(b) indirect and overhead costs of the Distributor associated with
performance of Distribution Activities including central office and
branch expenses;
(c) amounts paid to Prusec for performing services under a selected
dealer agreement between Prusec and the Distributor for sale of Class
C shares of the Fund, including sales commissions and trailer
commissions paid to, or on account of, agents and indirect and
overhead costs associated with Distribution Activities;
(d) advertising for the Fund in various forms through any available
medium, including the cost of printing and mailing Fund prospectuses,
statements of additional information and periodic financial reports
and sales literature to persons other than current shareholders of the
Fund; and
(e) sales commissions (including trailer commissions) paid to, or on
account of, broker-dealers and other financial institutions (other
than Prusec) which have entered into selected dealer agreements with
the Distributor with respect to shares of the Fund.
4. QUARTERLY REPORTS; ADDITIONAL INFORMATION
An appropriate officer of the Fund will provide to the Board of Directors
or 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 or Trustees of
4
<PAGE>
the Fund such additional information as they shall from time to time reasonably
request, including information about Distribution Activities undertaken or to be
undertaken by the Distributor.
The Distributor will inform the Board of Directors or 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 other 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 C shares of the Fund.
If approved by a vote of a majority of the outstanding voting securities of
the Class C shares of the Fund, the Plan shall, unless earlier terminated in
accordance with its terms, continue in full force and effect thereafter for so
long as such continuance is specifically approved at least annually by a
majority of the Board of Directors or Trustees of the Fund and a majority of the
Rule 12b-1 Directors or 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 or Trustees, or by vote of a majority of the outstanding voting
securities (as defined in the Investment
5
<PAGE>
Company Act) of the Class C 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 vote of a majority of the outstanding voting securities (as
defined in the Investment Company Act) of the Class C shares of the Fund. All
material amendments of the Plan shall be approved by a majority of the Board of
Directors or Trustees of the Fund and a majority of the Rule 12b-1 Directors or
Trustees by votes cast in person at a meeting called for the purpose of voting
on the Plan.
8. RULE 12b-1 DIRECTORS OR TRUSTEES
While the Plan is in effect, the selection and nomination of the Rule 12b-1
Directors or Trustees shall be committed to the discretion of the Rule 12b-1
Directors or 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.
*[10. ENFORCEMENT OF CLAIMS.
The name "Prudential ___________ Trust" is the designation of the Trustees
under a Declaration of Trust dated ______, 19__ and all persons dealing with the
Fund must look solely to the property
6
<PAGE>
of the Fund for the enforcement of any claims against the Fund, and neither the
Trustees, officers, agents of shareholders assume any personal liability for
obligations entered into on behalf of the Fund.]
Dated:
[mc]clb-comp.pln
7
