<PAGE>
As filed with the Securities and Exchange Commission on October 23, 1995
Registration No. 33-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
FORM N-14
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
/X/
PRE-EFFECTIVE AMENDMENT NO. / /
POST-EFFECTIVE AMENDMENT NO. / /
(Check appropriate box or boxes)
--------------
PRUDENTIAL GOVERNMENT INCOME FUND, INC.
(Formerly Prudential-Bache Government Plus Fund, Inc.)
(Exact name of registrant as specified in charter)
ONE SEAPORT PLAZA,
NEW YORK, NEW YORK 10292
(Address of Principal Executive Offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 214-1250
S. JANE ROSE, ESQ.
ONE SEAPORT PLAZA
NEW YORK, NEW YORK 10292
(NAME AND ADDRESS OF AGENT FOR SERVICE 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 ON NOVEMBER 22, 1995
PURSUANT TO RULE 488
OR SUCH EARLIER DATE AS THE COMMISSION ACTING PURSUANT TO RULE 488 MAY
DETERMINE.
REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(A)
MAY DETERMINE.
PURSUANT TO RULE 24F-2 UNDER THE INVESTMENT COMPANY ACT OF 1940, REGISTRANT
HAS PREVIOUSLY REGISTERED AN INDEFINITE NUMBER OF SHARES OF COMMON STOCK, PAR
VALUE $.01 PER SHARE, PURSUANT TO A REGISTRATION STATEMENT ON FORM N-1A (FILE
NO. 2-82976). THE REGISTRANT FILED A NOTICE UNDER RULE 24F-2 FOR ITS FISCAL YEAR
ENDED FEBRUARY 28, 1995 ON OR ABOUT APRIL 28, 1995. PURSUANT TO RULE 429 UNDER
THE SECURITIES ACT OF 1933, THE PROXY STATEMENT/PROSPECTUS RELATES TO SHARES
PREVIOUSLY REGISTERED ON FORM N-1A (FILE NO. 2-82976).
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<PAGE>
CROSS REFERENCE SHEET
(AS REQUIRED BY RULE 481(a)UNDER THE SECURITIES ACT OF 1933)
<TABLE>
<CAPTION>
N-14 ITEM NO. PROSPECTUS/PROXY
AND CAPTION STATEMENT CAPTION
- ---------------------------------------------------- ----------------------------------------
<S> <C> <C> <C>
PART A
Item 1. Beginning of Registration Statement and
Outside Front Cover Page of
Prospectus.............................. Cover Page
Item 2. Beginning and Outside Back Cover Page of
Prospectus.............................. Table of Contents
Item 3. Synopsis Information and Risk Factors... Synopsis; Principal Risk Factors
Item 4. Information about the Transaction....... Synopsis; The Proposed Transaction
Item 5. Information about the Registrant........ Information about Government Income Fund
Item 6. Information about the Company Being
Acquired................................ Information about U.S. Government Fund
Item 7. Voting Information...................... Voting Information
Item 8. Interest of Certain Persons and
Experts................................. Not Applicable
Item 9. Additional Information Required for
Reoffering by Persons Deemed to be
Underwriters............................ Not Applicable
PART B
STATEMENT OF ADDITIONAL
INFORMATION CAPTION
----------------------------------------
Item 10. Cover Page.............................. Cover Page
Item 11. Table of Contents....................... Cover Page
Item 12. Additional Information about the
Registrant.............................. Statement of Additional Information of
Prudential Government Income Fund, Inc.
dated May 1, 1995.
Item 13. Additional Information about the Company
Being Acquired.......................... Not Applicable
Item 14. Financial Statements.................... Statement of Additional Information of
Prudential Government Income Fund, Inc.
dated May 1, 1995.
PART C
Information required to be included in Part C is set forth under the appropriate item,
so numbered, in Part C of this Registration Statement.
</TABLE>
<PAGE>
PRELIMINARY COPY
PRUDENTIAL U.S. GOVERNMENT FUND
ONE SEAPORT PLAZA
NEW YORK, NEW YORK 10292
--------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
--------------
To our Shareholders:
Notice is hereby given that a Special Meeting of Shareholders of Prudential
U.S. Government Fund (U.S. Government Fund) will be held at 10:00 A.M. on
January 12, 1996, at 199 Water Street, New York, N.Y. 10292, for the following
purposes:
1. To approve an Agreement and Plan of Reorganization and Liquidation
whereby all of the assets of U.S. Government Fund will be transferred to
Prudential Government Income Fund, Inc. (Government Income Fund) in exchange for
shares of Government Income Fund, and Government Income Fund will assume all of
the liabilities, if any, of U.S. Government Fund.
2. To consider and act upon any other business as may properly come before
the Meeting or any adjournment thereof.
Only shares of U.S. Government Fund of record at the close of business on
November 2, 1995, are entitled to notice of and to vote at this Meeting or any
adjournment thereof.
S. JANE ROSE
SECRETARY
Dated: November , 1995
WHETHER OR NOT YOU EXPECT TO ATTEND THE MEETING, PLEASE SIGN AND PROMPTLY
RETURN THE ENCLOSED PROXY IN THE ENCLOSED STAMPED SELF-ADDRESSED ENVELOPE.
IN ORDER TO AVOID THE ADDITIONAL EXPENSE OF FURTHER SOLICITATION, WE ASK
YOUR COOPERATION IN MAILING IN YOUR PROXY PROMPTLY.
<PAGE>
PRELIMINARY COPY
PRUDENTIAL GOVERNMENT INCOME FUND, INC.
PROSPECTUS
AND
PRUDENTIAL U.S. GOVERNMENT FUND
PROXY STATEMENT
ONE SEAPORT PLAZA
NEW YORK, NEW YORK 10292
(800) 225-1852
--------------
Prudential U.S. Government Fund (U.S. Government Fund) has registered as an
open-end, diversified management investment company. Prudential Government
Income Fund, Inc. (Government Income Fund) has registered as an open-end,
diversified management investment company. Both U.S. Government Fund and
Government Income Fund (collectively, the Funds) are managed by Prudential
Mutual Fund Management, Inc. (PMF or the Manager) and have the same office
address. The investment objective of U.S. Government Fund is to seek a high
total return (capital appreciation plus high current income). The investment
objective of Government Income Fund is to seek a high current return.
This Prospectus and Proxy Statement is being furnished to shareholders of
U.S. Government Fund in connection with a proposed Agreement and Plan of
Reorganization and Liquidation (the Plan), whereby Government Income Fund will
acquire all of the assets of U.S. Government Fund and assume the liabilities, if
any, of U.S. Government Fund. If the Plan is approved by U.S. Government Fund's
shareholders, all such shareholders will be issued shares of Government Income
Fund in place of the shares of U.S. Government Fund held by them, and U.S.
Government Fund will be liquidated. Shareholders of Government Income Fund are
not being asked to vote on the Plan.
This Prospectus and Proxy Statement sets forth concisely information about
Government Income Fund that prospective investors should know before investing.
This Prospectus and Proxy Statement is accompanied by (i) the Prospectus of
Government Income Fund, dated May 1, 1995, including May 17, 1995 and July 3,
1995 Supplements thereto, and the Prospectus of U.S. Government Fund, dated
January 3, 1995, including May 5, 1995, May 12, 1995, July 3, 1995 and October
2, 1995 Supplements thereto, which Prospectuses are incorporated by reference
herein and (ii) the Government Income Fund Annual Report to Shareholders for the
fiscal year ended February 28, 1995 and the U.S. Government Fund Annual Report
to Shareholders for the fiscal year ended October 31, 1994, which Annual Reports
are incorporated by reference herein. The Statement of Additional Information of
U.S. Government Fund, dated January 3, 1995, including August 1, 1995 and
September 29, 1995 Supplements thereto, and the Statement of Additional
Information of Government Income Fund, dated May 1, 1995, including August 1,
1995 and September 29, 1995 Supplements thereto, have been filed with the
Securities and Exchange Commission (SEC), are incorporated herein by reference
and are available without charge upon written request to Prudential Mutual Fund
Services, Inc., Raritan Plaza One, Edison, New Jersey 08837 or by calling the
toll-free number shown above. Additional information, contained in a Statement
of Additional Information, dated November , 1995, forming a part of Government
Income Fund's Registration Statement on Form N-14, has been filed with the SEC,
is incorporated herein by reference and is available without charge upon request
to the address or telephone number shown above.
This Prospectus and Proxy Statement will first be mailed to shareholders on
or about November , 1995.
Investors are advised to read and retain this Prospectus and Proxy Statement
for further reference.
--------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this Prospectus and Proxy Statement is November , 1995.
<PAGE>
PRUDENTIAL GOVERNMENT INCOME FUND, INC.
PRUDENTIAL U.S. GOVERNMENT FUND
ONE SEAPORT PLAZA
NEW YORK, NEW YORK 10292
--------------
PROSPECTUS AND PROXY STATEMENT DATED NOVEMBER , 1995
--------------
SYNOPSIS
The following synopsis is a summary of certain information contained
elsewhere in this Prospectus and Proxy Statement and the Agreement and Plan of
Reorganization and Liquidation and is qualified by reference to the more
complete information contained herein as well as in the enclosed Prudential U.S.
Government Fund (U.S. Government Fund) Prospectus and the enclosed Prudential
Government Income Fund, Inc. (Government Income Fund) Prospectus. Shareholders
should read the entire Prospectus and Proxy Statement carefully.
GENERAL
This Proxy Statement is furnished by the Trustees of U.S. Government Fund in
connection with the solicitation of Proxies for use at a Special Meeting of
Shareholders of U.S. Government Fund (the Meeting) to be held at 10:00 A.M., on
January 12, 1996 at 199 Water Street, New York, New York 10292, U.S. Government
Fund's principal executive office. The purpose of the Meeting is to approve or
disapprove an Agreement and Plan of Reorganization and Liquidation (the Plan)
whereby all of the assets of U.S. Government Fund will be acquired by, and the
liabilities of U.S. Government Fund, if any, will be assumed by, Government
Income Fund, and such other business as may properly come before the Meeting or
any adjournment thereof. The Plan is attached to this Prospectus and Proxy
Statement as Appendix A. The transactions contemplated by the Plan are set forth
herein and in summary provide that Government Income Fund will acquire the
assets, in exchange solely for shares of Government Income Fund, and assume the
liabilities, if any, of U.S. Government Fund.
Approval of the Plan requires the affirmative vote of a majority of shares
of U.S. Government Fund outstanding and entitled to vote. Shareholders vote in
the aggregate and not by separate class. Approval of the Plan by the
shareholders of Government Income Fund is not required and the Plan is not being
submitted for their approval.
THE PROPOSED REORGANIZATION AND LIQUIDATION
The Trustees of U.S. Government Fund and the Board of Directors of
Government Income Fund have approved the Plan, which provides for the transfer
of all of the assets of U.S. Government Fund to Government Income Fund in
exchange solely for shares of Government Income Fund and the assumption by
Government Income Fund of the liabilities, if any, of U.S. Government Fund.
Following shareholder approval, if obtained, Class A, Class B and Class C shares
of Government Income Fund will be distributed to Class A, Class B and Class C
shareholders of U.S. Government Fund, respectively, and U.S. Government Fund
will be liquidated. The reorganization will become effective as soon as
practicable after the Meeting. Each U.S. Government Fund Class A, Class B and
Class C shareholder will receive the number of full and
2
<PAGE>
fractional Class A, Class B and Class C shares of Government Income Fund,
respectively, equal in value (rounded to the third decimal place) to such
shareholder's Class A, Class B and Class C shares of U.S. Government Fund as of
the closing date.
For the reasons set forth below under "-- Reasons for the Proposed
Reorganization and Liquidation" and "The Proposed Transaction -- Reasons for the
Reorganization and Liquidation," the Trustees of U.S. Government Fund and the
Board of Directors of Government Income Fund, including those Trustees/
Directors who are not "interested persons" (Independent Trustees/Directors) as
that term is defined in the Investment Company Act of 1940, as amended
(Investment Company Act), have concluded that the reorganization would be in the
best interests of the shareholders of U.S. Government Fund and Government Income
Fund and that the interests of shareholders of each Fund will not be diluted as
a result of the proposed transaction. Accordingly, the Trustees of U.S.
Government Fund and the Board of Directors of the Government Income Fund
recommend approval of the Plan.
REASONS FOR THE PROPOSED REORGANIZATION AND LIQUIDATION
There are a number of similarities between the Funds that led to
consideration of the Plan. Each Fund is an open-end, diversified management
investment company primarily seeking a high return. Both Funds invest a
significant portion of their assets in U.S. Government and agency securities.
The Funds are also similar in that: Prudential Mutual Fund Management, Inc.
(PMF or the Manager) serves as Manager to both Funds; The Prudential Investment
Corporation (PIC) serves as subadviser to both Funds; Prudential Mutual Fund
Distributors, Inc. (PMFD) acts as the distributor for the Class A shares
distributed by each of the Funds; Prudential Securities Incorporated (PSI) acts
as the Distributor of the Class B and C shares distributed by each of the Funds;
and Prudential Mutual Fund Services, Inc. (PMFS) serves as Transfer Agent and
Dividend Disbursing Agent to both Funds. In addition, each Fund pays dividends
of net investment income, if any, monthly and makes distributions of any net
capital gains at least annually.
Barbara L. Kenworthy, a managing director and senior portfolio manager of
Prudential Investment Advisors, a unit of PIC, is the portfolio manager of both
Funds. She is responsible for the day to day management of the portfolios. Ms.
Kenworthy has managed the Government Income Fund since July 1994 and has managed
the U.S. Government Fund since May 1995. Ms. Kenworthy joined PIC in July 1994,
having previously been employed by The Dreyfus Corporation (from June 1985 to
June 1994) where she served as president and portfolio manager for several
Dreyfus fixed-income funds. Ms. Kenworthy also serves as the portfolio manager
of other investment companies advised by PIC.
There are also a number of differences between the Funds. See "-- Certain
Differences Between Government Income Fund and U.S. Government Fund" below.
U.S. Government Fund was organized as a Massachusetts business trust on
September 22, 1986, and commenced investment operations on November 7, 1986.
U.S. Government Fund has, in the current market environment, been unable to
attract sufficient new assets to offset redemptions and has incurred increased
expense ratios. U.S. Government Fund has had fluctuating aggregate net assets
ranging from a high of $232 million in mid-1987 to a low of [$ ] million as
of October 31, 1995, representing a 46% decline from the Fund's high. With its
aggregate net asset level, U.S. Government Fund has incurred high expenses and
does not enjoy the economies of scale of Government Income Fund (the net assets
of which have also declined but, at $ as of October 31, 1995, are still
much larger than U.S. Government Fund's net assets). The ratios of total
expenses to average net assets for the fiscal year ended February 28, 1995, for
the
3
<PAGE>
Government Income Fund were .98%, 1.66% and 1.63% (annualized) for the Class A,
Class B and Class C shares, respectively (including distribution fees). The
ratios of total expenses to average net assets for the fiscal year ended October
31, 1994, for U.S. Government Fund were 1.09%, 1.75% and 1.82% (annualized) for
the Class A, Class B and Class C shares, respectively (including distribution
fees). If distribution fees are excluded, the ratios of total expenses to
average net assets for the fiscal year ended February 28, 1995, for Government
Income Fund were .83%, .80% and .88% (annualized) for the Class A, Class B and
Class C shares, respectively. If distribution fees are excluded, the ratios of
total expenses to average net assets for the fiscal year ended October 31, 1994,
for U.S. Government Fund were .94%, .94% and 1.07% (annualized) for the Class A,
Class B and Class C shares, respectively.
Below is total return information for the Class A, Class B and Class C
shares of U.S. Government Fund for the fiscal years ended October 31, 1992, 1993
and 1994, and for the six-month period ended April 30, 1995, and for the Class
A, Class B and Class C shares of Government Income Fund for the fiscal years
ended February 28/29, 1993, 1994 and 1995 and for the six-month period ended
August 31, 1995. The following tables are derived from the "Financial
Highlights" of each Fund. "Financial Highlights" for Government Income Fund are
set forth in that Fund's Prospectus and Annual Report, which accompany this
Prospectus and Proxy Statement, and in its Semi-Annual Report which is included
in Appendix B to this Prospectus and Proxy Statement. "Financial Highlights" for
U.S. Government Fund are set forth in that Fund's Prospectus, and Annual Report,
which accompany this Prospectus and Proxy Statement, and in its Semi-Annual
Report which is included in Appendix C to this Prospectus and Proxy Statement.
U.S. GOVERNMENT FUND
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
OCTOBER 31,
SIX MONTHS ENDED ----------------------------------------
APRIL 30, 1995 1994 1993 1992
------------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Class A:
TOTAL RETURN** 8.14% (7.80%) 16.43% 9.39%
Class B:
TOTAL RETURN** 7.78 % (8.57%) 15.44% 8.46%
Class C*:
TOTAL RETURN** 7.82 % (3.03%) N/A N/A
</TABLE>
- ------------------------
*The Fund commenced offering its Class C shares on August 1, 1994.
**Total return does not consider the effect of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
4
<PAGE>
GOVERNMENT INCOME FUND
<TABLE>
<CAPTION>
SIX MONTHS FISCAL YEAR ENDED
ENDED FEBRUARY 28/29,
AUGUST 31, -----------------------------------------------
1995 1995 1994 1993
------------- ------------- ------------- -----------------
<S> <C> <C> <C> <C>
Class A:
TOTAL RETURN** 8.12% .83% 3.90% 11.55%
Class B:
TOTAL RETURN** 7.75% .24% 3.03% 10.61%
Class C*:
TOTAL RETURN** 7.80% 2.75% N/A N/A
</TABLE>
- ------------------------
*The Fund commenced offering its Class C shares on August 1, 1994.
**Total return does not consider the effect of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
The Funds have similar investment objectives and substantially similar
investment policies. Accordingly, in view of, among other things, the
comparatively smaller asset size and higher expense ratio of U.S. Government
Fund, the Trustees of the U.S. Government Fund and the Board of Directors of the
Government Income Fund, including the Independent Trustees/Directors of the
respective Funds, have concluded that it would be appropriate to combine the two
Funds, with Government Income Fund as the survivor. The proposed transaction
would give Government Income Fund the opportunity to increase its assets by
acquiring securities consistent with its investment objective and policies in
exchange for the issuance of its shares.
The Trustees of U.S. Government Fund have determined that approval of the
Plan would be in the best interests of U.S. Government Fund and its shareholders
for the reasons discussed above. See, also, "The Proposed Transaction -- Reasons
for the Reorganization and Liquidation" below.
CERTAIN DIFFERENCES BETWEEN GOVERNMENT INCOME FUND AND U.S. GOVERNMENT FUND
While the investment objective and policies of both Funds are similar, there
are a few important differences between the Funds.
The investment objective of Government Income Fund is to seek a high current
return. Government Income Fund has sought to achieve this objective primarily by
investing in U.S. Government securities, including U.S. Treasury Bills, Notes,
Bonds and other debt securities issued by the U.S. Treasury, and obligations
issued or guaranteed by U.S. Government agencies or instrumentalities, and by
engaging in various derivative transactions such as the purchase and sale of put
and call options. In an effort to hedge against changes in interest rates and
thus preserve its capital, the Fund may also engage in transactions involving
futures contracts on U.S. Government securities, options on such futures and
interest rate swaps.
The investment objective of U.S. Government Fund is to seek a high total
return (capital appreciation plus high current income). U.S. Government Fund has
sought to achieve this objective primarily by investing in U.S. Government
securities, including U.S. Treasury Bills, Notes, Bonds and other debt
securities issued
5
<PAGE>
by the U.S. Treasury, and obligations issued or guaranteed by U.S. Government
agencies or instrumentalities. For hedging and income enhancement purposes, U.S.
Government Fund may also engage in various derivative transactions such as the
purchase and sale of put and call options on U.S. Government securities and
transactions involving futures contracts on U.S. Government securities and
options thereon.
Prudential Securities Incorporated (Prudential Securities or PSI) acts as
the Distributor of the Class B and C shares distributed by each Fund. Under each
Fund's Distribution and Service Plans, PSI may receive for its
distribution-related activities with respect to each of the Class B and C shares
a fee at an annual rate of up to 1% of the average daily net assets of each of
the Class B and C shares (should assets exceed $3 billion, the Government Income
Fund's annual rate with respect to Class B shares would be .80 of 1% of the next
$1 billion of such net assets and .50 of 1% of such net assets in excess of $4
billion). PSI has agreed with the U.S. Government Fund to limit its current fee
to .85 of 1% in relation to the Class B shares and to .75 of 1% in relation to
the Class C shares for the current fiscal year. PSI has agreed with the
Government Income Fund to limit its current fee to .825 of 1% in relation to the
Class B shares and to .75 of 1% in relation to the Class C shares for the
current fiscal year.
STRUCTURE OF U.S. GOVERNMENT FUND AND GOVERNMENT INCOME FUND
U.S. Government Fund is organized as a Massachusetts business trust and its
Declaration of Trust permits the Trustees to issue an unlimited number of full
and fractional shares of beneficial interest ($.01 par value per share) in
separate series and classes within such series. U.S. Government Fund consists of
three classes of shares, designated Class A, Class B and Class C. Each
shareholder is entitled to a full vote for each full share of beneficial
interest held. Each class represents an interest in the same assets of the Fund
and is identical in all respects except that each class bears certain
distribution expenses and has voting rights with respect to certain distribution
and service plans. The U.S. Government Fund has received an order of the
Securities and Exchange Commission (SEC) permitting the issuance and sale of
multiple classes of shares. Currently, the Fund is offering only three classes,
designated as Class A, Class B and Class C shares. Each share of each class 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 U.S. Government Fund is entitled to its portion of
all of such Fund's assets after all debt and expenses of that Fund have been
paid. Since Class B and Class C shares generally bear higher distribution
expenses than Class A shares, the liquidation proceeds to shareholders of Class
B and Class C shares are likely to be lower than to Class A shareholders.
Government Income Fund is organized as a Maryland corporation and is
authorized to issue 2 billion 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 666,666,666 2/3 authorized shares. Each class
of common stock represents an interest in the same assets of the Fund and are
identical in all respects except that each class bears certain distribution
expenses and has voting rights with respect to certain distribution and service
plans. The Fund has received an order of the SEC permitting the issuance and
sale of multiple classes of shares. Currently, the Fund is offering only three
classes, designated as Class A, Class B and Class C 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 Government
Income Fund is entitled to its portion
6
<PAGE>
of all of such Fund's assets after all debt and expenses of that 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 Class
B and Class C shares are likely to be lower than to Class A shareholders.
Both Government Income Fund's Articles of Incorporation and U.S. Government
Fund's Declaration of Trust permit each Fund's respective Board of
Directors/Trustees to authorize the creation of additional series of common
stock/beneficial interest, and classes within such series, with such
preferences, privileges, limitations and voting and dividend rights as the Board
of Directors/Trustees may determine. Government Income Fund's Board of Directors
has recently authorized the creation of a new class of shares, Class Z shares.
The new class would be offered exclusively to the trustee of the Prudential
Securities 401(k) Plan. The new class would be offered without either a
front-end or a back-end sales charge and without a distribution or service fee.
Government Income Fund Class A shareholders who are participants in the
Prudential Securities 401(k) Plan will have their shares automatically exchanged
for Class Z shares when shares of the new class are first offered, which is
expected to occur in January 1996.
The Board of Directors of Government Income Fund may increase the number of
authorized shares without the approval of shareholders. Shares of each Fund,
when issued as described in each Fund's Prospectus, are fully paid,
nonassessable by the Fund, fully transferable and redeemable at the option of
the holder. Shares are also redeemable at the option of each Fund under certain
circumstances. Neither Fund's shares have cumulative voting rights for the
election of its respective Directors/Trustees.
INVESTMENT OBJECTIVE AND POLICIES -- GOVERNMENT INCOME FUND
The investment objective of Government Income Fund is to seek a high current
return. Government Income Fund has sought to achieve this objective primarily by
investing in U.S. Government securities, including U.S. Treasury Bills, Notes,
Bonds and other debt securities issued by the U.S. Treasury, and obligations
issued or guaranteed by U.S. Government agencies or instrumentalities, and by
engaging in various derivative transactions such as the purchase and sale of put
and call options. In an effort to hedge against changes in interest rates and
thus preserve its capital, Government Income Fund may also engage in
transactions involving futures contracts on U.S. Government securities, options
on such futures, interest rate swaps and dollar rolls.
The other investment policies of Government Income Fund are substantially
similar to the other investment policies of U.S. Government Fund.
FEES AND EXPENSES
MANAGEMENT FEES. PMF, the Manager of each Fund and a wholly-owned
subsidiary of The Prudential Insurance Company of America (Prudential), is
compensated, pursuant to a management agreement with each of the Funds, at an
annual rate of .50 of 1% of the average daily net assets of each respective
Fund. Government Income Fund pays the Manager at an annual rate of .35 of 1% of
its average daily net assets in excess of $3 billion.
Under Subadvisory Agreements between PMF and PIC with respect to both Funds,
PIC, as Subadviser, provides investment advisory services for the management of
each Fund. Pursuant to the Subadvisory Agreements, PMF will reimburse PIC for
its reasonable costs and expenses in providing subadvisory services. PMF
continues to have responsibility for all investment advisory services pursuant
to the Management Agreements for both Funds and supervises the Subadviser's
performance of its services on behalf of each Fund.
7
<PAGE>
DISTRIBUTION FEES. PMFD, a wholly-owned subsidiary of PMF, serves as the
distributor of the Class A shares of each of the Funds. Prudential Securities, a
wholly-owned subsidiary of Prudential, serves as the distributor for Class B and
Class C shares of each of the Funds. PMFD and PSI incur distribution expenses
under separate plans of distribution adopted by each Fund pursuant to Rule 12b-1
under the Investment Company Act (12b-1 Plans) and under separate distribution
agreements. These expenses include (i) commissions and account servicing fees,
(ii) advertising expenses, (iii) the cost of printing and mailing prospectuses
and (iv) indirect and overhead costs associated with the sale of each Fund's
shares.
Each Fund has a 12b-1 Plan with respect to its Class A shares pursuant to
which each Fund may pay PMFD for its distribution-related activities with
respect to Class A shares at an annual rate of up to .30 of 1% of the average
daily net assets of each Fund's respective Class A shares. Each Class A 12b-1
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. PMFD has agreed with each Fund to limit
its distribution fees payable under their respective Class A 12b-1 Plans to .15
of 1% of the average daily net assets of each Fund's respective Class A shares
for the fiscal year ending October 31, 1996, with respect to U.S. Government
Fund, and for the fiscal year ending February 28, 1996, with respect to
Government Income Fund.
Government Income Fund has a 12b-1 Plan with respect to its Class B shares
pursuant to which Government Income Fund may pay PSI for its
distribution-related activities with respect to Class B shares at an annual rate
of up to 1% of the average daily net assets up to $3 billion, .80 of 1% of the
next $1 billion of such net assets and .50 of 1% of such net assets in excess of
$4 billion. The Class B 12b-1 Plan provides for payment to PSI of (i) an
asset-based sales charge of up to .75 of 1% of the average daily net assets of
the Class B shares up to $3 billion, .55 of 1% of the next $1 billion of such
net assets and .25 of 1% of such net assets in excess of $4 billion, and (ii) a
service fee of up to .25 of 1% of the average daily net assets of the Class B
shares. PSI has agreed to limit its distribution-related fees payable under the
Class B 12b-1 Plan to .825 of 1% of the average daily net assets of the Class B
shares for the fiscal year ending February 28, 1996.
U.S. Government Fund has a 12b-1 Plan with respect to its Class B shares
pursuant to which U.S. Government Fund may pay PSI for its distribution-related
activities with respect to Class B shares at an annual rate of up to 1% of the
average daily net assets of such Fund's Class B shares. The Class B 12b-1 Plan
provides for payment to PSI of (i) an asset-based sales charge of up to .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. PSI
has agreed to limit its distribution-related fees payable under the Class B
12b-1 Plan to .85 of 1% of the average daily net assets of the Class B shares
for the fiscal year ending October 31, 1996.
Each Fund has a 12b-1 Plan with respect to its Class C shares pursuant to
which each Fund may pay PSI for its distribution-related activities with respect
to Class C shares at an annual rate of up to 1% of the average daily net assets
of such Fund's Class C shares. Each Class C 12b-1 Plan provides for payment to
PSI of (i) an asset-based sales charge of up to .75 of 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. PSI has agreed to limit its
distribution-related fees payable under each Fund's Class C 12b-1 Plan to .75 of
1% of the average daily net assets of each Fund's respective Class C shares for
the fiscal year ending October 31, 1996, with respect to U.S. Government Fund,
and for the fiscal year ending February 28, 1996, with respect to Government
Income Fund.
For the fiscal year ended October 31, 1994, U.S. Government Fund paid fees
of $10,639 to PMFD under its Class A 12b-1 Plan, $1,155,906 to PSI under its
Class B 12b-1 Plan and $42 to PSI under its Class C 12b-1 Plan. In addition,
PMFD received approximately $72,400 in initial sales charges with respect to the
Fund's
8
<PAGE>
Class A shares, PSI received approximately $446,200 in contingent deferred sales
charges with respect to the Fund's Class B shares and PSI received approximately
$42 in contingent deferred sales charges with respect to the Fund's Class C
shares.
For the fiscal year ended February 28, 1995, Government Income Fund paid
fees of $143,341 to PMFD under its Class A 12b-1 Plan, $14,862,736 to PSI under
its Class B 12b-1 Plan and $484 to PSI under its Class C 12b-1 Plan. In
addition, PMFD received approximately $196,000 in initial sales charges with
respect to the Fund's Class A shares, PSI received approximately $3,123,000 in
contingent deferred sales charges with respect to the Fund's Class B shares and
PSI received approximately $98 in contingent deferred sales charges with respect
to the Fund's Class C shares.
OTHER EXPENSES. Each Fund also pays certain other expenses in connection
with its operation, including accounting, custodian, legal, audit, transfer
agency and registration expenses.
FEE WAIVERS AND SUBSIDY. PMF may from time to time waive all or a portion
of its management fee and subsidize all or a portion of the operating expenses
of each Fund. Fee waivers and expense subsidies will increase a Fund's yield and
total return. The distributors of the Funds' shares may also from time to time
waive all or a portion of the distribution expenses payable to them under the
Funds' respective 12b-1 Plans. Any fee waiver or subsidy may be terminated at
any time without notice after which a Fund's expenses will increase and its
yield and total return will be reduced.
EXPENSE RATIOS. For the fiscal year ended October 31, 1994, total expenses,
excluding distribution fees, stated as a percentage of average net assets of
U.S. Government Fund were .94%, .94% and 1.07% for Class A, Class B and Class C
shares, respectively. For the fiscal year ended February 28, 1995, total
expenses, excluding distribution fees, stated as a percentage of average net
assets of Government Income Fund were .83%, .80% and .88% for Class A, Class B
and Class C shares, respectively.
Set forth below is a comparison of each Fund's operating expenses for the
fiscal year ended October 31, 1994, in the case of U.S. Government Fund, and the
fiscal year ended February 28, 1995, in the case of Government Income Fund. The
ratios are also shown on a pro forma (estimated) combined basis, giving effect
to the reorganization.
<TABLE>
<CAPTION>
ANNUAL FUND
OPERATING
EXPENSES (AS A U.S. GOVERNMENT FUND GOVERNMENT INCOME FUND PRO FORMA COMBINED
PERCENTAGE OF ------------------------- ------------------------- -------------------------
AVERAGE NET ASSETS) CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C
- -------------------- ------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Management Fees..... .50 % .50 % .50 % .50 % .500 % .50 % .50 % .500 % .50 %
12b-1 Fees*......... .15 .85 .75 .15 .825 .75 .15 .825 .75
Other Expenses...... .44 .44 .44 .30 .300 .30 .30 .300 .30
------- ------- ------- ------- ------- ------- ------- ------- -------
Total Fund Operating
Expenses........... 1.09 % 1.79 % 1.69 % .95 % 1.625 % 1.55 % .95 % 1.625 % 1.55 %
------- ------- ------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- ------- ------- -------
</TABLE>
- ------------------------------
* Although the Class A, Class B and Class C Distribution and Service Plans
provide that each of the Funds may pay a distribution fee of up to .30 of 1%
per annum of the average daily net assets of the Class A shares and 1% of the
average daily net assets of each of the Class B and Class C shares, the
Distributor has agreed to limit its distribution fees (i) with respect to each
Fund's Class A shares to no more than .15 of 1% of the average daily net
assets of the Class A shares, (ii) with respect to U.S. Government Fund's
Class B shares to no more than .85 of 1% of the average daily net assets of
such Fund's Class B shares, (iii) with respect to Government Income Fund's
Class B shares to no more than .825 of 1% of the average daily net assets of
such Fund's Class B shares, and (iv) with respect to each Fund's Class C
shares to no more than .75 of 1% of the average daily net assets of the Class
C shares.
9
<PAGE>
Set forth below is an example which shows the expenses that an investor in
the combined Fund would pay on a $1,000 investment, based upon the pro forma
ratios set forth above.
<TABLE>
<CAPTION>
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ----------------------------------------------------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment, assuming (1) 5%
annual return and (2) redemption at the end of each time period:
Class A.................................................................... $ 50 $ 70 $ 92 $ 155
Class B.................................................................... $ 67 $ 82 $ 100 $ 153
Class C.................................................................... $ 26 $ 50 $ 86 $ 188
You would pay the following expenses on the same investment, assuming no
redemption:
Class A.................................................................... $ 50 $ 70 $ 92 $ 155
Class B.................................................................... $ 17 $ 52 $ 90 $ 170
Class C.................................................................... $ 16 $ 50 $ 86 $ 188
</TABLE>
THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
PURCHASES AND REDEMPTIONS
Purchases of shares of U.S. Government Fund and Government Income Fund are
made through PSI, Pruco Securities Corporation (Prusec), an affiliated
broker/dealer, or directly from the respective Fund through their transfer
agent, PMFS, at the net asset value per share next determined after receipt of a
purchase order by PMFS, Prusec or PSI plus, in the case of each Fund, a sales
charge which may be imposed either (i) at the time of purchase (Class A shares)
or (ii) on a deferred basis (Class B or Class C shares).
The minimum initial investment for Class A and Class B shares of each Fund
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 is $50. With
respect to both Funds, Class A shares are sold with an initial sales charge of
up to 4.00% of the offering price. Class B shares are sold without an initial
sales charge but are subject to a contingent deferred sales charge (5% during
the first year decreasing by 1% annually to 1% in the fifth and sixth years and
0% in the seventh year) which will be imposed on certain redemptions made within
six years of purchase. Although Class B shares are subject to higher ongoing
distribution-related expenses than Class A shares, Class B shares will
automatically convert to Class A shares (which are subject to lower ongoing
distribution-related expenses) approximately seven years after purchase. Class C
shares are sold without an initial sales charge and for one year after purchase
are subject to a 1% contingent deferred sales charge on redemptions. Like Class
B shares, Class C shares are subject to higher ongoing distribution-related
expenses than Class A shares but, unlike Class B shares, Class C shares do not
convert to another class.
Shares of each Fund may be redeemed at any time at the net asset value next
determined after PSI or PMFS receives the sell order. As indicated above, the
proceeds of redemptions of Class B and Class C shares are subject to a
contingent deferred sales charge. No contingent deferred sales charges will be
imposed in connection with the reorganization.
10
<PAGE>
EXCHANGE PRIVILEGES
Shareholders of both Funds have an exchange privilege with certain other
Prudential Mutual Funds, including one or more specified money market funds,
subject to the minimum investment requirements of such funds. Class A, Class B
and Class C shares of either Fund may be exchanged for Class A, Class B and
Class C shares, respectively, of another fund on the basis of relative net asset
value. No sales charge will be imposed at the time of the exchange. Any
applicable contingent deferred sales charge payable upon the redemption of
shares exchanged will be calculated from the first day of the month after the
initial purchase excluding the time shares were held in a money market fund.
Class B and Class C shares may not be exchanged into money market funds other
than Prudential Special Money Market Fund. With respect to both Funds, an
exchange for shares of another Prudential Mutual Fund is treated as a redemption
and purchase for tax purposes.
DIVIDENDS AND DISTRIBUTIONS
Each Fund expects to declare daily and pay dividends of net investment
income, if any, monthly and make distributions of any net capital gains, if any,
at least annually. Shareholders of both Funds receive dividends and other
distributions in additional shares of the Fund unless they elect to receive them
in cash. A U.S. Government Fund shareholder's election with respect to
reinvestment of dividends and distributions in U.S. Government Fund will be
automatically applied with respect to Government Income Fund shares he or she
receives pursuant to the reorganization.
FEDERAL TAX CONSEQUENCES OF PROPOSED REORGANIZATION
Prior to the consummation of the reorganization, the Funds shall have
received an opinion of Shereff, Friedman, Hoffman & Goodman, LLP, or a private
letter ruling from the Internal Revenue Service (IRS), to the effect that the
proposed reorganization will constitute a tax-free reorganization within the
meaning of Section 368(a)(1)(C) of the Internal Revenue Code of 1986, as amended
(the Internal Revenue Code). Accordingly, no gain or loss will be recognized to
either Fund upon the transfer of assets and the assumption of liabilities, if
any, or to shareholders of U.S. Government Fund upon their receipt of shares of
Government Income Fund solely in return for shares of U.S. Government Fund. The
tax basis for the shares of Government Income Fund received by U.S. Government
Fund shareholders will be the same as their tax basis for the shares of U.S.
Government Fund to be constructively surrendered in exchange therefor. In
addition, the holding period of the shares of Government Income Fund to be
received pursuant to the reorganization will include the period during which the
shares of U.S. Government Fund to be constructively surrendered in exchange
therefor were held, provided the latter shares were held as capital assets by
the shareholders on the date of the exchange. See "The Proposed Transaction --
Tax Considerations."
PRINCIPAL RISK FACTORS
As the investment policies of both Funds are similar, the risks associated
with such investments are also similar. Below is a summary of such risks. For a
more complete discussion of the risks attendant to an investment in Government
Income Fund, please see pages 8 through 16 of the Government Income Fund
Prospectus, which accompanies this Prospectus and Proxy Statement and is
incorporated herein by reference.
Investors in Government Income Fund should recognize that U.S. Government
securities, including those which are guaranteed by Federal agencies or
instrumentalities, may or may not be backed by the "full faith and credit" of
the United States. In the case of securities not backed by the full faith and
credit of the
11
<PAGE>
United States, the Government Income Fund must look principally to the agency
issuing or guaranteeing the obligation for ultimate repayment and may not be
able to assert a claim against the United States itself in the event the agency
or instrumentality does not meet its commitments.
The Government Income Fund may engage in short selling and use leverage,
including dollar rolls and bank borrowings, which entail additional risks to the
Fund. The Fund may also engage in various hedging and income enhancement
strategies, including derivative transactions such as the purchase and sale of
put and call options on U.S. Government securities, transactions involving
futures contracts on U.S. Government securities and options on such futures
contracts and in interest rate swap transactions.
THE PROPOSED TRANSACTION
AGREEMENT AND PLAN OF REORGANIZATION AND LIQUIDATION
The terms and conditions under which the proposed transaction may be
consummated are set forth in the Plan. Significant provisions of the Plan are
summarized below; however, this summary is qualified in its entirety by
reference to the Plan, a copy of which is attached as Appendix A to this
Prospectus and Proxy Statement.
The Plan contemplates (i) Government Income Fund acquiring all of the assets
of U.S. Government Fund in exchange solely for shares of Government Income Fund
and the assumption by Government Income Fund of U.S. Government Fund's
liabilities, if any, as of the Closing Date (hereafter defined) and (ii) the
constructive distribution on the date of the exchange, expected to occur on or
about January 19, 1996 (the "Closing Date") of such Class A, Class B and Class C
shares of Government Income Fund to the Class A, Class B and Class C
shareholders of U.S. Government Fund, as provided for by the Plan.
The assets of U.S. Government Fund to be acquired by Government Income Fund
shall include, without limitation, all cash, cash equivalents, securities,
receivables (including interest and dividends receivable) and other property of
any kind owned by U.S. Government Fund and any deferred or prepaid assets shown
as assets on the books of U.S Government Fund. Government Income Fund will
assume all debts, liabilities, obligations and duties of U.S. Government Fund of
whatever kind or name, if any; provided, however, that U.S. Government Fund will
utilize its best efforts, to the extent practicable, to discharge all of its
known debts, liabilities, obligations and duties prior to the Closing Date.
Government Income Fund will deliver to U.S Government Fund Class A, Class B and
Class C shares of Government Income Fund, which U.S. Government Fund will then
distribute to its Class A, Class B and Class C shareholders, respectively.
The value of U.S. Government Fund assets to be acquired and liabilities to
be assumed by Government Income Fund and the net asset value of a share of
Government Income Fund will be determined as of 4:15 P.M., New York time, on the
Closing Date and will be determined in accordance with the valuation procedures
of the respective Fund's then-current Prospectus and Statement of Additional
Information.
As soon as practicable after the Closing Date, U.S. Government Fund will
liquidate and distribute PRO RATA to its shareholders of record the Class A,
Class B and Class C shares of Government Income Fund received by U.S. Government
Fund in exchange for such shareholders' interest in U.S. Government Fund
evidenced by their shares of U.S. Government Fund. Such liquidation and
distribution will be accomplished by opening accounts on the books of Government
Income Fund in the names of U.S. Government Fund shareholders and by
transferring thereto the Class A, Class B and Class C shares of Government
Income Fund previously credited to the account of U.S. Government Fund on those
books. Each shareholder
12
<PAGE>
account shall represent the respective PRO RATA number of Government Income Fund
shares due to such U.S. Government Fund shareholder. Fractional shares of
Government Income Fund will be rounded to the third decimal place.
Accordingly, every participating shareholder of U.S. Government Fund will
own shares of Government Income Fund immediately after the reorganization that,
except for rounding, will have a total value equal to the total value of that
shareholder's respective Class A, Class B and Class C shares of U.S. Government
Fund immediately prior to the reorganization. Moreover, because Class A, Class B
and Class C shares of Government Income Fund will be issued at net asset value
in exchange for net assets of U.S. Government Fund that, except for rounding,
will equal the aggregate value of those shares, the net asset value per share of
Government Income Fund will be unchanged. Thus, the reorganization will not
result in a dilution of the value of any shareholder account. However, in
general, each U.S. Government Fund shareholder will have a percentage of
ownership in Government Income Fund substantially less than such shareholder's
current percentage of ownership of U.S. Government Fund because, while such
shareholder will have the same dollar amount invested initially in Government
Income Fund that he or she had invested in U.S. Government Fund, his or her
investment will represent a smaller percentage of the combined net assets of
Government Income Fund and U.S. Government Fund.
Any transfer taxes payable upon issuance of shares of Government Income Fund
in a name other than that of the registered holder of the shares on the books of
U.S. Government Fund as of that time shall be paid by the person to whom such
shares are to be issued as a condition of such transfer. Any reporting
responsibility of U.S. Government Fund will continue to be the responsibility of
U.S. Government Fund up to and including the Closing Date and such later date on
which U.S. Government Fund is liquidated.
The consummation of the proposed transaction is subject to a number of
conditions set forth in the Plan, some of which may be waived by the Board of
Directors/Trustees of the Funds. The Plan may be terminated and the proposed
transaction abandoned at any time, before or after approval by the shareholders
of U.S. Government Fund, prior to the Closing Date. In addition, the Plan may be
amended in any mutually agreeable manner, except that no amendment may be made
subsequent to the Meeting of shareholders of U.S. Government Fund that would
detrimentally affect the value of Government Income Fund shares to be
distributed.
REASONS FOR THE REORGANIZATION AND LIQUIDATION
The Trustees of U.S. Government Fund, including a majority of the
Independent Trustees, have determined that the interests of U.S. Government Fund
shareholders will not be diluted as a result of the proposed transaction and
that the proposed transaction is in the best interests of the shareholders of
U.S. Government Fund. In addition, the Board of Directors of Government Income
Fund, including a majority of the Independent Directors, has determined that the
interests of Government Income Fund shareholders will not be diluted as a result
of the proposed transaction and that the proposed transaction is in the best
interests of the shareholders of Government Income Fund.
The reasons for the proposed transaction are described above under "Synopsis
- -- Reasons for the Proposed Reorganization and Liquidation." The Board of
Directors/Trustees of the Funds based their decision to approve the Plan on an
inquiry into a number of factors, including the following:
(1) the relative past growth in assets and investment performance and future
prospects of the Funds;
(2) the effect of the proposed transaction on the expense ratios of each
Fund;
13
<PAGE>
(3) the costs of the reorganization, which will be paid for by each Fund in
proportion to its respective asset level;
(4) the tax-free nature of the reorganization to the Funds and their
shareholders;
(5) the potential benefits to PMF, PMFD and PSI (see "Synopsis -- Fees and
Expenses" above); and
(6) the compatibility of the investment objectives, policies and
restrictions of the Funds.
If the Plan is not approved by U.S. Government Fund shareholders, the U.S.
Government Fund Trustees may consider other appropriate action, such as the
liquidation of U.S. Government Fund or a merger or other business combination
with an investment company other than Government Income Fund.
DESCRIPTION OF SECURITIES TO BE ISSUED
Government Income Fund is authorized to issue 2,000,000,000 shares of common
stock with $.01 par value per shares and currently offers Class A, Class B and
Class C shares. Class A, Class B and Class C shares of Government Income Fund
will be issued to Class A, Class B and Class C shareholders, respectively, of
U.S. Government Fund on the Closing Date. Each share represents an equal and
proportionate interest in Government Income Fund. Shares entitle their holders
to one vote per full share and fractional votes for fractional shares held. Each
share of Government Income Fund has equal voting, dividend and liquidation
rights with other shares, except that (i) each class has exclusive voting rights
with respect to its distribution and service plan (except that Government Income
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), (ii) each class bears different distribution
expenses, (iii) each class has a different exchange privilege and (iv) only
Class B shares have a conversion feature.
TAX CONSIDERATIONS
Prior to the Closing, U.S. Government Fund will receive an opinion from
Shereff, Friedman, Hoffman & Goodman, LLP, or a private letter ruling from the
IRS, to the effect that (1) the proposed transaction described above will
constitute a reorganization within the meaning of Section 368(a)(1)(C) of the
Internal Revenue Code; (2) no gain or loss will be recognized by shareholders of
U.S. Government Fund upon their receipt of shares, including fractional shares,
of Government Income Fund in exchange for their shares of U.S. Government Fund
(Internal Revenue Code Section 354(a)(1)); (3) no gain or loss will be
recognized by U.S. Government Fund upon the transfer of its assets to Government
Income Fund in exchange solely for shares of Government Income Fund and the
assumption by Government Income Fund of U.S. Government Fund's liabilities, if
any, and the subsequent distribution of those shares to its shareholders in
liquidation thereof (Internal Revenue Code Sections 361(a) and 357(a)); (4) no
gain or loss will be recognized by Government Income Fund upon the receipt of
such assets in exchange solely for Government Income Fund shares and its
assumption of U.S. Government Fund's liabilities, if any (Internal Revenue Code
Section 1032(a)); (5) Government Income Fund's basis for the assets received
pursuant to the reorganization will be the same as the basis thereof in the
hands of U.S. Government Fund immediately before the reorganization, and the
holding period of those assets in the hands of Government Income Fund will
include the holding period thereof in U.S. Government Fund hands (Internal
Revenue Code Sections 362(b) and 1223(2)); (6) U.S. Government Fund
shareholders' basis for the shares of Government Income Fund to be received by
them pursuant to the reorganization will be the same as their basis for the
shares of U.S. Government Fund constructively surrendered in exchange therefor
(Internal Revenue Code Section 358(a)(1)); and (7) the holding period of the
shares of Government Income Fund to be received by the shareholders of U.S.
Government Fund pursuant to the reorganization will include the period during
which
14
<PAGE>
the shares of U.S. Government Fund constructively surrendered in exchange
therefor were held, provided the latter shares were held as capital assets by
the shareholders on the date of the exchange (Internal Revenue Code Section
1223(1)).
CERTAIN COMPARATIVE INFORMATION ABOUT THE FUNDS
ORGANIZATION. Government Income Fund is a Maryland corporation and the
rights of its shareholders are governed by its Articles of Incorporation,
By-Laws and the Maryland General Corporation Law. U.S. Government Fund is a
Massachusetts business trust and the rights of its shareholders are governed by
its Declaration of Trust and By-Laws and Massachusetts common law.
CAPITALIZATION. Government Income Fund has issued shares of common stock,
par value $.01 per share. Its Articles of Incorporation authorize it to issue
2,000,000,000 shares to be divided initially into three classes, consisting of
666,666,666 2/3 shares of Class A, Class B and Class C common stock. U.S.
Government Fund has issued shares of beneficial interest, par value $.01 per
share. The Declaration of Trust of U.S. Government Fund permits the Trustees to
issue an unlimited number of full and fractional shares in separate series, with
classes within such series.
SHAREHOLDER MEETINGS AND VOTING RIGHTS. Generally, neither Fund is required
to hold annual meetings of its shareholders. Each Fund is required to call a
meeting of shareholders for the purpose of voting upon the question of removal
of a Director/Trustee when requested in writing to do so by the holders of at
least 10% of the Fund's outstanding shares. In addition, each Fund is required
to call a meeting of shareholders for the purpose of electing Directors/Trustees
if, at any time, less than a majority of the Directors/Trustees holding office
were elected by shareholders.
Shareholders of each Fund are entitled to one vote for each share on all
matters submitted to a vote of its shareholders under Maryland or Massachusetts
law, as the case may be. Approval of certain matters, such as an amendment to
the Articles of Incorporation or Declaration of Trust, as the case may be, a
merger, consolidation or transfer of all or substantially all assets,
dissolution and removal of a Director/Trustee, requires the affirmative vote of
a majority of the votes entitled to be cast. Other matters require the approval
of the affirmative vote of a majority of the votes cast at a meeting at which a
quorum is present.
Each Fund's By-Laws provide that a majority of the outstanding shares shall
constitute a quorum for the transaction of business at a shareholders' meeting.
Matters requiring a larger vote by law or under the organizational documents for
each Fund are not affected by such quorum requirements.
SHAREHOLDER LIABILITY. Under Maryland law, shareholders of Government
Income Fund have no personal liability for Government Income Fund's acts or
obligations. Under Massachusetts law, however, shareholders of a Massachusetts
business trust could, under certain circumstances, be held personally liable for
its obligations. The Declaration of Trust relating to U.S. Government Fund,
however, contains an express disclaimer of liability for the acts, obligations
or affairs of U.S. Government Fund. The Declaration of Trust also provides for
indemnification and reimbursement of claims, liabilities and expenses incurred
by a shareholder of the U.S. Government Fund by reason of his having been a
shareholder.
LIABILITY AND INDEMNIFICATION OF DIRECTORS/TRUSTEES. Under Government
Income Fund's Articles of Incorporation and Maryland law, a director or officer
of the Fund is not liable to the Fund or its shareholders for monetary damages
for breach of fiduciary duty as a Director or officer except to the extent such
exemption from liability or limitation thereof is not permitted by law,
including the Investment Company
15
<PAGE>
Act. Under U.S. Government Fund's Declaration of Trust, no Trustee or officer of
U.S. Government Fund shall be liable to the U.S. Government Fund or its
shareholders for any action or failure to act except for his own bad faith,
willful misfeasance, gross negligence or reckless disregard of his duties.
Under the Investment Company Act, a Director/Trustee may not be protected
against liability to the Fund and its security holders to which he would
otherwise be subject as a result of his willful misfeasance, bad faith or gross
negligence in the performance of his duties, or by reason of reckless disregard
of his obligations and duties. The staff of the SEC interprets the Investment
Company Act to require additional limits on indemnification of
Directors/Trustees and officers.
PRO FORMA CAPITALIZATION AND RATIOS
The following table shows the capitalization of each Fund as of August 31,
1995 and the pro forma combined capitalization of both Funds as if the
reorganization had occurred on that date.
<TABLE>
<CAPTION>
U.S. GOVERNMENT FUND GOVERNMENT INCOME FUND PRO FORMA COMBINED
------------------------- ------------------------- -------------------------
CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Assets (000).............. $47,080 $79,075 $ 194 $915,780 $621,267 $ 606 $962,860 $700,342 $ 800
Net Asset Value per share..... $ 10.01 $ 10.01 $10.01 $ 8.98 $ 8.99 $ 8.99 $ 8.98 $ 8.99 $ 8.99
Shares Outstanding (000)...... 4,705 7,899 19 101,972 69,129 67 107,214 77,925 89
</TABLE>
The following table shows the ratio of expenses to average net assets and
the ratio of net investment income to average net assets of U.S. Government Fund
for the fiscal year ended October 31, 1994 and of Government Income Fund for the
fiscal year ended February 28, 1995. The ratios are also shown on a pro forma
combined basis.
<TABLE>
<CAPTION>
U.S. GOVERNMENT FUND GOVERNMENT INCOME FUND PRO FORMA COMBINED
------------------------- ------------------------- -------------------------
CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Ratio of expenses to average
net assets................... 1.09 % 1.75 % 1.82 %* .98 % 1.66 % 1.63 %* .95 % 1.62 5% 1.55 %*
Ratio of net investment income
to average net assets........ 6.35 % 5.65 % 6.25 %* 7.45 % 6.17 % 6.69 %* 7.45 % 6.17 % 6.69 %*
</TABLE>
- ------------------------
* Annualized
INFORMATION ABOUT GOVERNMENT INCOME FUND
FINANCIAL INFORMATION
For condensed financial information for Government Income Fund, see
"Financial Highlights" in the Government Income Fund Prospectus and Annual
Report to Shareholders, which accompany this Prospectus and Proxy Statement.
Also see Appendix B, which contains Government Income Fund's Semi-Annual Report
to Shareholders for the six months ended August 31, 1995.
GENERAL
For a discussion of the organization, classification and sub-classification
of Government Income Fund, see "General Information" and "Fund Highlights" in
the Government Income Fund Prospectus.
INVESTMENT OBJECTIVE AND POLICIES
For a discussion of Government Income Fund's investment objective and
policies and risk factors associated with an investment in Government Income
Fund, see "How the Fund Invests" in the Government Income Fund Prospectus.
16
<PAGE>
DIRECTORS
For a discussion of the responsibilities of Government Income Fund's Board
of Directors, see "How the Fund is Managed" in the Government Income Fund
Prospectus.
MANAGER AND PORTFOLIO MANAGER
For a discussion of Government Income Fund's Manager, subadviser and
portfolio manager, see "How
the Fund is Managed -- Manager" in the Government Income Fund Prospectus.
PERFORMANCE
For a discussion of Government Income Fund's performance during the fiscal
year ended February 28, 1995, see the Government Income Fund Prospectus and
Annual Report to Shareholders, which accompany this Prospectus and Proxy
Statement. Also see Appendix B, which contains the Fund's Semi-Annual Report to
Shareholders for the six months ended August 31, 1995.
GOVERNMENT INCOME FUND SHARES
For a discussion of Government Income Fund's Class A, Class B and Class C
shares, including voting rights and exchange rights, and how the shares may be
purchased and redeemed, see "Shareholder Guide" and "How the Fund is Managed" in
the Government Income Fund Prospectus.
NET ASSET VALUE
For a discussion of how the offering price of Government Income Fund Class
A, Class B and Class C shares is determined, see "How the Fund Values its
Shares" in the Government Income Fund Prospectus.
TAXES, DIVIDENDS AND DISTRIBUTIONS
For a discussion of Government Income Fund's policy with respect to
dividends and distributions and the tax consequences of an investment in
Government Income Fund Class A, Class B or Class C shares, see "Taxes, Dividends
and Distributions" in the Government Income Fund Prospectus.
ADDITIONAL INFORMATION
Government Income Fund is subject to the informational requirements of the
Investment Company Act and in accordance therewith files reports and other
information with the SEC. Proxy material, reports and other information filed by
Government Income Fund can be inspected and copied at the public reference
facilities maintained by the SEC at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549 and at the SEC's regional offices in New York (7 World
Trade Center, Suite 1300, New York, New York 10048) and Chicago (Citicorp
Center, Suite 1400, 500 West Madison Street, Chicago, Illinois 60661-2511).
Copies of such material can be obtained at prescribed rates from the Public
Reference Branch, Office of Consumer Affairs and Information Services,
Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, D.C.
20549.
17
<PAGE>
INFORMATION ABOUT U.S. GOVERNMENT FUND
FINANCIAL INFORMATION
For condensed financial information for U.S. Government Fund, see "Financial
Highlights" in the U.S. Government Fund Prospectus and Annual Report to
Shareholders, which accompany this Prospectus and Proxy Statement. Also see
Appendix C, which contains U.S. Government Fund's Semi-Annual Report to
Shareholders for the six months ended April 30, 1995.
GENERAL
For a discussion of the organization, classification and sub-classification
of U.S. Government Fund, see "General Information" and "Fund Highlights" in the
U.S. Government Fund Prospectus.
INVESTMENT OBJECTIVE AND POLICIES
For a discussion of U.S. Government Fund's investment objective and
policies, see "How the Fund Invests" in the U.S. Government Fund Prospectus.
TRUSTEES
For a discussion of the responsibilities of U.S. Government Fund's Trustees,
see "How the Fund is Managed" in the U.S. Government Fund Prospectus.
MANAGER AND PORTFOLIO MANAGER
For a discussion of U.S. Government Fund's Manager, subadviser and portfolio
manager, see "How the Fund is Managed -- Manager" in the U.S. Government Fund
Prospectus.
PERFORMANCE
For a discussion of U.S. Government Fund's performance during the fiscal
year ended October 31, 1994, see the U.S. Government Fund Prospectus and Annual
Report to Shareholders, which accompany this Prospectus and Proxy Statement.
Also see Appendix C, which contains the Fund's Semi-Annual Report to
Shareholders, for performance information for the six months ended April 30,
1995.
U.S. GOVERNMENT FUND'S SHARES
For a discussion of U.S. Government Fund's Class A, Class B and Class C
shares, including voting rights, exchange rights and the conversion feature of
Class B shares, and how the shares may be purchased and redeemed, see
"Shareholder Guide" and "How the Fund is Managed" in the U.S. Government Fund
Prospectus.
NET ASSET VALUE
For a discussion of how the offering price of U.S. Government Fund's Class
A, Class B and Class C shares is determined, see "How the Fund Values its
Shares" in the U.S. Government Fund Prospectus.
TAXES, DIVIDENDS AND DISTRIBUTIONS
For a discussion of U.S. Government Fund's policy with respect to dividends
and distributions and the tax consequences of an investment in U.S. Government
Fund's Class A, Class B or Class C shares, see "Taxes, Dividends and
Distributions" in the U.S. Government Fund Prospectus.
ADDITIONAL INFORMATION
U.S. Government Fund is subject to the informational requirements of the
Investment Company Act and in accordance therewith files reports and other
information with the SEC. Reports and other information filed by U.S. Government
Fund can be inspected and copied at the public reference facilities maintained
18
<PAGE>
by the Securities and Exchange Commission at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549 and at the SEC's regional offices in New York (7 World
Trade Center, Suite 1300, New York, New York 10048) and Chicago (Citicorp
Center, Suite 1400, 500 West Madison Street, Chicago, Illinois 60661-2511).
Copies of such material can also be obtained at prescribed rates from the Public
Reference Branch, Office of Consumer Affairs and Information Services,
Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, D.C.
20549.
VOTING INFORMATION
If the accompanying form of Proxy is executed properly and returned, shares
represented by it will be voted at the Meeting in accordance with the
instructions on the Proxy. However, if no instructions are specified, shares
will be voted for the proposal. A Proxy may be revoked at any time prior to the
time it is voted by written notice to the Secretary of U.S. Government Fund or
by attendance at the Meeting. If sufficient votes to approve the proposal are
not received, the persons named as proxies may propose one or more adjournments
of the Meeting to permit further solicitation of Proxies. Any such adjournment
will require the affirmative vote of a majority of those shares present at the
Meeting or represented by proxy. When voting on a proposed adjournment, the
persons named as proxies will vote all shares that they are entitled to vote for
the proposed adjournment, unless directed to disapprove the proposal, in which
case such shares will be voted against the proposed adjournment. In the event
that the Meeting is adjourned, the same procedures will apply at a later Meeting
date.
If a Proxy that is properly executed and returned, accompanied by
instructions to withhold authority to vote, represents a broker "non-vote" (that
is, a Proxy from a broker or nominee indicating that such person has not
received instructions from the beneficial owner or other person entitled to vote
shares on a particular matter with respect to which the broker or nominee does
not have discretionary power), the shares represented thereby will be considered
not to be present at the Meeting for purposes of determining the existence of a
quorum for the transaction of business and be deemed not cast with respect to
such proposal. If no instructions are received by the broker or nominee from the
shareholder with reference to routine matters, the shares represented thereby
may be considered for purposes of determining the existence of a quorum for the
transaction of business and will be deemed cast with respect to such proposal.
Also, a properly executed and returned Proxy marked with an abstention will be
considered present at the Meeting for purposes of determining the existence of a
quorum for the transaction of business. However, abstentions and broker
"non-votes" do not constitute a vote "for" or "against" the matter, but have the
effect of a negative vote on matters which require approval by a requisite
percentage of the outstanding shares.
The close of business on November 2, 1995 has been fixed as the record date
for the determination of shareholders entitled to notice of, and to vote at, the
Meeting. On that date, U.S. Government Fund had Class A shares,
Class B shares and Class C shares outstanding and
entitled to vote.
Each share of U.S. Government Fund will be entitled to one vote at the
Meeting. It is expected that the Notice of Special Meeting, Prospectus and Proxy
Statement and form of Proxy will be mailed to shareholders on or about November
, 1995.
As of November 2, 1995, the Trustees and officers of U.S. Government Fund,
as a group, owned [less than 1% of the outstanding shares of such Fund.]
19
<PAGE>
As of November 2, 1995, the following shareholders owned beneficially or of
record 5% or more of U.S. Government Fund's outstanding Class A, Class B or
Class C shares:
The expenses of reorganization and solicitation will be borne by U.S.
Government Fund and Government Income Fund in proportion to their respective
assets and will include reimbursement of brokerage firms and others for expenses
in forwarding proxy solicitation material to the shareholders of U.S. Government
Fund. The Trustees of U.S. Government Fund have retained Shareholder
Communications Corporation, a proxy solicitation firm, to assist in the
solicitation of proxies for the Meeting. The fees and expenses of Shareholder
Communications Corporation are not expected to exceed $12,600, excluding mailing
and printing costs. The solicitation of Proxies will be largely by mail but may
include telephonic, telegraphic or oral communication by regular employees of
Prudential Securities and its affiliates, including PMF. This cost, including
specified expenses, also will be borne by U.S. Government Fund and Government
Income Fund in proportion to their respective assets.
OTHER MATTERS
No business other than as set forth herein is expected to come before the
Meeting, but should any other matter requiring a vote of shareholders of U.S.
Government Fund arise, including any question as to an adjournment of the
Meeting, the persons named in the enclosed Proxy will vote thereon according to
their best judgment in the interests of U.S. Government Fund, taking into
account all relevant circumstances.
SHAREHOLDERS' PROPOSALS
Any U.S. Government Fund shareholder proposal intended to be presented at
any subsequent meeting of the shareholders of U.S. Government Fund must be
received by U.S. Government Fund a reasonable time before the Trustees'
solicitation relating to such meeting is made in order to be included in U.S.
Government Fund's Proxy Statement and form of Proxy relating to that meeting.
The mere submission of a proposal by a shareholder does not guarantee that such
proposal will be included in the proxy statement because certain rules under the
federal securities laws must be complied with before inclusion of the proposal
is required. In the event that the Plan is approved at this Meeting, it is not
expected that there will be any future shareholder meetings of U.S. Government
Fund.
It is the present intent of the Trustees of U.S. Government Fund and of the
Board of Directors of the Government Income Fund not to hold annual meetings of
shareholders unless the election of Directors/ Trustees is required under the
Investment Company Act nor to hold special meetings of shareholders unless
required by the Investment Company Act or state law.
S. Jane Rose
SECRETARY
Dated November , 1995
20
<PAGE>
APPENDIX A
FORM OF AGREEMENT AND PLAN OF REORGANIZATION AND LIQUIDATION
Agreement and Plan of Reorganization and Liquidation (Agreement) made as of
the th day of , 1996, by and between Prudential U.S. Government
Fund (U.S. Government Fund) and Prudential Government Income Fund, Inc. (Income
Fund) (collectively, the Funds and each individually, a Fund). U.S. Government
Fund is a Massachusetts business trust and maintains its principal place of
business at One Seaport Plaza, New York, New York 10292. Income Fund is a
corporation organized under the laws of the State of Maryland and maintains its
principal place of business at One Seaport Plaza, New York, New York 10292. U.S.
Government Fund is divided into three classes, designated Class A, Class B and
Class C. Income Fund is divided into four classes, designated Class A, Class B,
Class C and Class Z.
This Agreement is intended to be, and is adopted as, a plan of
reorganization pursuant to Section 368(a)(1)(C) of the Internal Revenue Code of
1986, as amended (Internal Revenue Code). The reorganization will comprise the
transfer of substantially all of the assets of U.S. Government Fund, in exchange
solely for shares of the Income Fund and Income Fund's assumption of U.S.
Government Fund's liabilities, if any, incurred in the ordinary course of
business and the constructive distribution, after the Closing Date hereinafter
referred to, of such shares of the Income Fund to the shareholders of U.S.
Government Fund in liquidation of U.S. Government Fund as provided herein, all
upon the terms and conditions as hereinafter set forth.
In consideration of the premises and of the covenants and agreements set
forth herein, the parties covenant and agree as follows:
1. TRANSFER OF ASSETS OF U.S. GOVERNMENT FUND IN EXCHANGE FOR SHARES OF THE
INCOME FUND AND ASSUMPTION OF LIABILITIES, IF ANY, AND LIQUIDATION OF U.S.
GOVERNMENT FUND.
1.1 Subject to the terms and conditions herein set forth and on the basis of
the representations and warranties contained herein, U.S. Government Fund agrees
to sell, assign, transfer and deliver its assets, as set forth in paragraph 1.2,
to Income Fund, and Income Fund agrees (a) to issue and deliver to U.S.
Government Fund in exchange therefor the number of shares in Income Fund
determined by dividing the net asset value of U.S. Government Fund allocable to
shares of Class A, Class B and Class C, respectively (computed in the manner and
as of the time and date set forth in paragraph 2.1), by the net asset value
allocable to a Class A, Class B and Class C share, respectively, of the Income
Fund (computed in the manner and as of the time and date set forth in paragraph
2.2); and (b) to assume all of U.S. Government Fund's liabilities, if any, as
set forth in paragraph 1.3. Such transactions shall take place at the closing
provided for in paragraph 3 (Closing).
1.2 The assets of U.S. Government Fund to be acquired by Income Fund shall
include without limitation all cash, cash equivalents, securities, receivables
(including interest and dividends receivable) and other property of any kind
owned by U.S. Government Fund and any deferred or prepaid expenses shown as
assets on the books of U.S. Government Fund on the closing date provided in
paragraph 3 (Closing Date). Income Fund has no plan or intent to sell or
otherwise dispose of any assets of U.S. Government Fund.
1.3 Except as otherwise provided herein, Income Fund will assume all debts,
liabilities, obligations and duties of U.S. Government Fund of whatever kind or
nature, whether absolute, accrued, contingent or
A-1
<PAGE>
otherwise, whether or not determinable as of the Closing Date and whether or not
specifically referred to in this Agreement; provided, however, that U.S.
Government Fund agrees to utilize its best efforts to discharge all of its known
debts, liabilities, obligations and duties prior to the Closing Date.
1.4 On or immediately prior to the Closing Date, U.S. Government Fund will
declare and pay to its shareholders of record dividends and/or other
distributions so that it will have distributed substantially all (and in any
event not less than ninety-eight percent) of its investment company taxable
income (computed without regard to any deduction for dividends paid), net
tax-exempt interest income, if any, and realized net capital gains, if any, for
all taxable years through its liquidation.
1.5 On a date (Liquidation Date), as soon after the Closing Date as is
conveniently practicable, U.S. Government Fund will take all necessary action to
terminate its Declaration of Trust and distribute PRO RATA to its Class A, Class
B and Class C shareholders of record, respectively, determined as of the close
of business on the Closing Date, the Class A, Class B and Class C shares,
respectively, of the Income Fund, received by U.S. Government Fund pursuant to
paragraph 1.1 in exchange for their interest in U.S. Government Fund. Such
distribution will be accomplished by opening accounts on the books of the Income
Fund in the names of U.S. Government Fund shareholders and transferring thereto
the shares credited to the account of U.S. Government Fund on the books of the
Income Fund. Each account opened shall be credited with the respective PRO RATA
number of shares of the Income Fund due each U.S. Government Fund Class A, Class
B and Class C shareholder, respectively. Fractional shares of the Income Fund
shall be rounded to the third decimal place.
1.6 The Income Fund shall not issue certificates representing its shares in
connection with such exchange. With respect to any U.S. Government Fund
shareholder holding U.S. Government Fund share certificates as of the Closing
Date, until the Income Fund is notified by U.S. Government Fund transfer agent
that such shareholder has surrendered his or her outstanding U.S. Government
Fund stock certificates or, in the event of lost, stolen or destroyed share
certificates, posted adequate bond or submitted a lost certificate form, as the
case may be, the Income Fund will not permit such shareholder to (1) receive
dividends or other distributions on the Income Fund shares in cash (although
such dividends and distributions shall be credited to the account of such
shareholder established on Income Fund's books pursuant to paragraph 1.5, as
provided in the next sentence), (2) exchange the Income Fund shares credited to
such shareholder's account for shares of other Prudential Mutual Funds, or (3)
pledge or redeem such shares. In the event that a shareholder is not permitted
to receive dividends or other distributions on the Income Fund shares in cash as
provided in the preceding sentence, the Income Fund shall pay such dividends or
other distributions in additional Income Fund shares, notwithstanding any
election such shareholder shall have made previously with respect to the payment
of dividends or other distributions on shares of U.S. Government Fund. U.S.
Government Fund will, at its expense, request its shareholders to surrender
their outstanding U.S. Government Fund share certificates, post adequate bond or
submit a lost certificate form, as the case may be.
1.7 Ownership of the Income Fund shares will be shown on the books of Income
Fund's transfer agent. Shares of Income Fund will be issued in the manner
described in Income Fund's then-current prospectus and statement of additional
information.
1.8 Any transfer taxes payable upon issuance of shares of the Income Fund in a
name other than the registered holder of the shares on the books of U.S.
Government Fund as of that time shall be paid by the person to whom such shares
are to be issued as a condition to the registration of such transfer.
A-2
<PAGE>
1.9 Any reporting responsibility to the Securities and Exchange Commission or
any state securities commission of U.S. Government Fund is and shall remain the
responsibility of U.S. Government Fund up to and including the Liquidation Date.
1.10 All books and records of U.S. Government Fund, including all books and
records required to be maintained under the Investment Company Act of 1940
(Investment Company Act) and the rules and regulations thereunder, shall be
available to Income Fund from and after the Closing Date and shall be turned
over to Income Fund on or prior to the Liquidation Date.
2. VALUATION
2.1 The value of U.S. Government Fund's assets and liabilities to be acquired
and assumed, respectively, by Income Fund shall be the net asset value computed
as of 4:15 p.m. on the Closing Date (such time and date being hereinafter called
the Valuation Time), using the valuation procedures set forth in U.S. Government
Fund's then-current prospectus and statement of additional information.
2.2 The net asset value of a share of the Income Fund shall be the net asset
value per such share computed as of the Valuation Time, using the valuation
procedures set forth in Income Fund's then-current prospectus and statement of
additional information.
2.3 The number of Income Fund shares to be issued (including fractional shares,
if any) in exchange for U.S. Government Fund net assets shall be calculated as
set forth in paragraph 1.1.
2.4 All computations of net asset value shall be made by or under the direction
of Prudential Mutual Fund Management, Inc. (PMF) in accordance with its regular
practice as manager of the Funds.
3. CLOSING AND CLOSING DATE
3.1 The Closing Date shall be January 19, 1996, or such later date as the
parties may agree in writing. All acts taking place at the Closing shall be
deemed to take place simultaneously as of the close of business on the Closing
Date unless otherwise provided. The Closing shall be at the office of Income
Fund or at such other place as the parties may agree.
3.2 State Street Bank and Trust Company (State Street), as custodian for U.S.
Government Fund, shall deliver to Income Fund at the Closing a certificate of an
authorized officer of State Street stating that (a) U.S. Government Fund's
portfolio securities, cash and any other assets have been transferred in proper
form to Income Fund on the Closing Date and (b) all necessary taxes, if any,
have been paid, or provision for payment has been made, in conjunction with the
transfer of portfolio securities.
3.3 In the event that immediately prior to the Valuation Time (a) the New York
Stock Exchange (NYSE) or other primary exchange is closed to trading or trading
thereon is restricted or (b) trading or the reporting of trading on the NYSE or
other primary exchange or elsewhere is disrupted so that accurate appraisal of
the value of the net assets of U.S. Government Fund and/or of the net asset
value per share of the Income Fund is impracticable, the Closing Date shall be
postponed until the first business day after the date when such trading shall
have been fully resumed and such reporting shall have been restored.
3.4 U.S. Government Fund shall deliver to Income Fund on or prior to the
Liquidation Date the names and addresses of its shareholders and the number of
outstanding shares owned by each such shareholder, all as of the close of
business on the Closing Date, certified by the Secretary or Assistant Secretary
of U.S. Government Fund. Income Fund shall issue and deliver to U.S. Government
Fund at the Closing a confirmation or other evidence satisfactory to U.S.
Government Fund that shares of the Income Fund have been or will be
A-3
<PAGE>
credited to U.S. Government Fund's account on the books of the Income Fund. At
the Closing each party shall deliver to the other such bills of sale, checks,
assignments, share certificates, receipts and other documents as such other
party or its counsel may reasonably request to effect the transactions
contemplated by this Agreement.
4. REPRESENTATIONS AND WARRANTIES
4.1 U.S. Government Fund represents and warrants as follows:
4.1.1 U.S. Government Fund is a business trust duly organized and validly
existing under the laws of the Commonwealth of Massachusetts;
4.1.2 U.S. Government Fund is an open-end management investment company
duly registered under the Investment Company Act, and such registration is
in full force and effect;
4.1.3 U.S. Government Fund is not, and the execution, delivery and
performance of this Agreement will not result, in violation of any provision
of its Declaration of Trust or By-Laws or of any material agreement,
indenture, instrument, contract, lease or other undertaking to which U.S.
Government Fund is a party or by which U.S. Government Fund is bound;
4.1.4 All material contracts or other commitments of U.S. Government Fund,
except this Agreement, will be terminated on or prior to the Closing Date
without U.S. Government Fund or Income Fund incurring any liability or
penalty with respect thereto;
4.1.5 No material litigation or administrative proceeding or investigation
of or before any court or governmental body is presently pending or to its
knowledge threatened against U.S. Government Fund or any of its properties
or assets. U.S. Government Fund knows of no facts that might form the basis
for the institution of such proceedings, and U.S. Government Fund is not a
party to or subject to the provisions of any order, decree or judgment of
any court or governmental body that materially and adversely affects its
business or its ability to consummate the transactions herein contemplated;
4.1.6 The Portfolio of Investments, Statement of Assets and Liabilities,
Statement of Operations, Statement of Changes in Net Assets, and Financial
Highlights of U.S. Government Fund at October 31, 1994 and for the year then
ended (copies of which have been furnished to Income Fund) have been audited
by Deloitte & Touche LLP, independent accountants, in accordance with
generally accepted auditing standards. Such financial statements are
prepared in accordance with generally accepted accounting principles and
present fairly, in all material respects, the financial condition, results
of operations, changes in net assets and financial highlights of U.S.
Government Fund as of and for the period ended on such date, and there are
no material known liabilities of U.S. Government Fund (contingent or
otherwise) not disclosed therein;
4.1.7 Since October 31, 1994, there has not been any material adverse
change in U.S. Government Fund's financial condition, assets, liabilities or
business other than changes occurring in the ordinary course of business, or
any incurrence by U.S. Government Fund of indebtedness maturing more than
one year from the date such indebtedness was incurred, except as otherwise
disclosed to and accepted by Income Fund. For the purposes of this paragraph
4.1.7, a decline in net asset value, net asset value per share or change in
the number of shares outstanding shall not constitute a material adverse
change;
4.1.8 At the date hereof and at the Closing Date, all federal and other tax
returns and reports of U.S. Government Fund required by law to have been
filed on or before such dates shall have been timely filed, and all federal
and other taxes shown as due on said returns and reports shall have been
paid
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<PAGE>
insofar as due, or provision shall have been made for the payment thereof,
and, to the best of U.S. Government Fund's knowledge, all federal or other
taxes required to be shown on any such return or report have been shown on
such return or report, no such return is currently under audit and no
assessment has been asserted with respect to such returns;
4.1.9 For each past taxable year since it commenced operations, U.S.
Government Fund has met the requirements of Subchapter M of the Internal
Revenue Code for qualification and treatment as a regulated investment
company and intends to meet those requirements for the current taxable year;
and, for each past calendar year since it commenced operations, U.S.
Government Fund has made such distributions as are necessary to avoid the
imposition of federal excise tax or has paid or provided for the payment of
any excise tax imposed;
4.1.10 All issued and outstanding shares of U.S. Government Fund are, and
at the Closing Date will be, duly and validly authorized, issued and
outstanding, fully paid and non-assessable by U.S. Government Fund. All
issued and outstanding shares of U.S. Government Fund will, at the time of
the Closing, be held in the name of the persons and in the amounts set forth
in the list of shareholders submitted to Income Fund in accordance with the
provisions of paragraph 3.4. U.S. Government Fund does not have outstanding
any options, warrants or other rights to subscribe for or purchase any of
its shares, nor is there outstanding any security convertible into any of
its shares, except for the Class B shares which have the conversion feature
described in U.S. Government Fund's then-current prospectus;
4.1.11 At the Closing Date, U.S. Government Fund will have good and
marketable title to its assets to be transferred to Income Fund pursuant to
paragraph 1.1, and full right, power and authority to sell, assign, transfer
and deliver such assets hereunder free of any liens, claims, charges or
other encumbrances, and, upon delivery and payment for such assets, Income
Fund will acquire good and marketable title thereto;
4.1.12 The execution, delivery and performance of this Agreement has been
duly authorized by the Trustees of U.S. Government Fund and by all necessary
corporate action, other than shareholder approval, on the part of U.S.
Government Fund, and this Agreement constitutes a valid and binding
obligation of U.S. Government Fund, subject to shareholder approval;
4.1.13 The information furnished and to be furnished by U.S. Government
Fund for use in applications for orders, registration statements, proxy
materials and other documents that may be necessary in connection with the
transactions contemplated hereby is and shall be accurate and complete in
all material respects and is in compliance and shall comply in all material
respects with applicable federal securities and other laws and regulations;
and
4.1.14 On the effective date of the registration statement filed with the
Securities and Exchange Commission (SEC) by Income Fund on Form N-14
relating to the shares of the Income Fund issuable thereunder, and any
supplement or amendment thereto (Registration Statement), at the time of the
meeting of the shareholders of U.S. Government Fund and on the Closing Date,
the Proxy Statement of U.S. Government Fund, the Prospectus of the Income
Fund and the Statements of Additional Information of both Funds to be
included in the Registration Statement (collectively, Proxy Statement) (i)
will comply in all material respects with the provisions and regulations of
the Securities Act of 1933 (1933 Act), Securities Exchange Act of 1934 (1934
Act) and the Investment Company Act and the rules and regulations thereunder
and (ii) will not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein in light of the
circumstances under which they were made or necessary to make the statements
therein not misleading; provided, however, that the representations
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<PAGE>
and warranties in this paragraph 4.1.14 shall not apply to statements in or
omissions from the Proxy Statement and Registration Statement made in
reliance upon and in conformity with information furnished by Income Fund
for use therein.
4.2 Income Fund represents and warrants as follows:
4.2.1 Income Fund is a corporation duly organized and validly existing
under the laws of the State of Maryland;
4.2.2 Income Fund is an open-end management investment company duly
registered under the Investment Company Act, and such registration is in
full force and effect;
4.2.3 Income Fund is not, and the execution, delivery and performance of
this Agreement will not result, in violation of any provision of its
Articles of Incorporation or By-Laws or of any material agreement,
indenture, instrument, contract, lease or other undertaking to which Income
Fund is a party or by which Income Fund is bound;
4.2.4 No material litigation or administrative proceeding or investigation
of or before any court or governmental body is presently pending or
threatened against Income Fund or any of its properties or assets, except as
previously disclosed in writing to U.S. Government Fund. Income Fund knows
of no facts that might form the basis for the institution of such
proceedings, and Income Fund is not a party to or subject to the provisions
of any order, decree or judgment of any court or governmental body that
materially and adversely affects its business or its ability to consummate
the transactions herein contemplated;
4.2.5 The Portfolio of Investments, Statement of Assets and Liabilities,
Statement of Operations, Statement of Changes in Net Assets, and Financial
Highlights of the Income Fund at February 28, 1995 and for the fiscal year
then ended (copies of which have been furnished to U.S. Government Fund)
have been audited by Deloitte & Touche LLP, independent accountants, in
accordance with generally accepted auditing standards. Such financial
statements are prepared in accordance with generally accepted accounting
principles and present fairly, in all material respects, the financial
condition, results of operations, changes in net assets and financial
highlights of the Income Fund as of and for the period ended on such date,
and there are no material known liabilities of the Income Fund (contingent
or otherwise) not disclosed therein;
4.2.6 Since February 28, 1995, there has not been any material adverse
change in the Income Fund's financial condition, assets, liabilities or
business other than changes occurring in the ordinary course of business, or
any incurrence by Income Fund of indebtedness maturing more than one year
from the date such indebtedness was incurred, except as otherwise disclosed
to and accepted by U.S. Government Fund. For the purposes of this paragraph
4.2.6, a decline in net asset value per share or a decrease in the number of
shares outstanding shall not constitute a material adverse change;
4.2.7 At the date hereof and at the Closing Date, all federal and other tax
returns and reports of Income Fund required by law to have been filed on or
before such dates shall have been filed, and all federal and other taxes
shown as due on said returns and reports shall have been paid insofar as
due, or provision shall have been made for the payment thereof, and, to the
best of Income Fund's knowledge, all federal or other taxes required to be
shown on any such return or report are shown on such return or report, no
such return is currently under audit and no assessment has been asserted
with respect to such returns;
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<PAGE>
4.2.8 For each past taxable year since it commenced operations, the Income
Fund has met the requirements of Subchapter M of the Internal Revenue Code
for qualification and treatment as a regulated investment company and
intends to meet those requirements for the current taxable year; and, for
each past calendar year since it commenced operations, Income Fund has made
such distributions as are necessary to avoid the imposition of federal
excise tax or has paid or provided for the payment of any excise tax
imposed;
4.2.9 All issued and outstanding shares of the Income Fund are, and at the
Closing Date will be, duly and validly authorized, issued and outstanding,
fully paid and non-assessable. Except as contemplated by this Agreement, the
Income Fund does not have outstanding any options, warrants or other rights
to subscribe for or purchase any of its shares nor is there outstanding any
security convertible into any of its shares;
4.2.10 The execution, delivery and performance of this Agreement has been
duly authorized by the Board of Directors of Income Fund and by all
necessary corporate action on the part of Income Fund, and this Agreement
constitutes a valid and binding obligation of Income Fund;
4.2.11 The shares of the Income Fund to be issued and delivered to U.S.
Government Fund pursuant to this Agreement will, at the Closing Date, have
been duly authorized and, when issued and delivered as provided in this
Agreement, will be duly and validly issued and outstanding shares of the
Income Fund, fully paid and non-assessable;
4.2.12 The information furnished and to be furnished by Income Fund for use
in applications for orders, registration statements, proxy materials and
other documents which may be necessary in connection with the transactions
contemplated hereby is and shall be accurate and complete in all material
respects and is and shall comply in all material respects with applicable
federal securities and other laws and regulations; and
4.2.13 On the effective date of the Registration Statement, at the time of
the meeting of the shareholders of U.S. Government Fund and on the Closing
Date, the Proxy Statement and the Registration Statement (i) will comply in
all material respects with the provisions of the 1933 Act, the 1934 Act and
the Investment Company Act and the rules and regulations under such Acts,
(ii) will not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading and (iii) with respect to the Registration
Statement, at the time it becomes effective, it will not contain an untrue
statement of a material fact or omit to state a material fact necessary to
make the statements therein in the light of the circumstances under which
they were made, not misleading; provided, however, that the representations
and warranties in this paragraph 4.2.13 shall not apply to statements in or
omissions from the Proxy Statement and the Registration Statement made in
reliance upon and in conformity with information furnished by U.S.
Government Fund for use therein.
5. COVENANTS OF INCOME FUND AND U.S. GOVERNMENT FUND
5.1 U.S. Government Fund and Income Fund each covenants to operate its
respective business in the ordinary course between the date hereof and the
Closing Date, it being understood that the ordinary course of business will
include declaring and paying customary dividends and other distributions and
such changes in operations as are contemplated by the normal operations of the
Funds, except as may otherwise be required by paragraphs 1.3 or 1.4 hereof.
A-7
<PAGE>
5.2 U.S. Government Fund covenants to call a shareholders' meeting to consider
and act upon this Agreement and to take all other action necessary to obtain
approval of the transactions contemplated hereby (including the determinations
of its Trustees as set forth in Rule 17a-8(a) under the Investment Company Act).
5.3 U.S. Government Fund covenants that the Income Fund shares to be received
by U.S. Government Fund in accordance herewith are not being acquired for the
purpose of making any distribution thereof other than in accordance with the
terms of this Agreement.
5.4 U.S. Government Fund covenants that it will assist Income Fund in obtaining
such information as Income Fund reasonably requests concerning the beneficial
ownership of U.S. Government Fund's shares.
5.5 Subject to the provisions of this Agreement, each Fund will take, or cause
to be taken, all action, and will do, or cause to be done, all things,
reasonably necessary, proper or advisable to consummate and make effective the
transactions contemplated by this Agreement.
5.6 U.S. Government Fund covenants to prepare the Proxy Statement in compliance
with the 1934 Act, the Investment Company Act and the rules and regulations
under each Act.
5.7 U.S. Government Fund covenants that it will, from time to time, as and when
requested by Income Fund, execute and deliver or cause to be executed and
delivered all such assignments and other instruments, and will take or cause to
be taken such further action, as Income Fund may deem necessary or desirable in
order to vest in and confirm to Income Fund title to and possession of all the
assets of U.S. Government Fund to be sold, assigned, transferred and delivered
hereunder and otherwise to carry out the intent and purpose of this Agreement.
5.8 Income Fund covenants to use all reasonable efforts to obtain the approvals
and authorizations required by the 1933 Act, the Investment Company Act
(including the determinations of its Board of Directors as set forth in Rule
17a-8(a) thereunder) and such of the state Blue Sky or securities laws as it may
deem appropriate in order to continue its operations after the Closing Date.
5.9 Income Fund covenants that it will, from time to time, as and when
requested by U.S. Government Fund, execute and deliver or cause to be executed
and delivered all such assignments and other instruments, and will take and
cause to be taken such further action, as U.S. Government Fund may deem
necessary or desirable in order to (i) vest in and confirm to U.S. Government
Fund title to and possession of all the shares of the Income Fund to be
transferred to U.S. Government Fund pursuant to this Agreement and (ii) assume
all of U.S. Government Fund's liabilities in accordance with this Agreement.
6. CONDITIONS PRECEDENT TO OBLIGATIONS OF U.S. GOVERNMENT FUND
The obligations of U.S. Government Fund to consummate the transactions
provided for herein shall be subject to the performance by Income Fund of all
the obligations to be performed by it hereunder on or before the Closing Date
and the following further conditions:
6.1 All representations and warranties of Income Fund contained in this
Agreement shall be true and correct in all material respects as of the date
hereof and, except as they may be affected by the transactions contemplated by
this Agreement, as of the Closing Date with the same force and effect as if made
on and as of the Closing Date.
6.2 Income Fund shall have delivered to U.S. Government Fund on the Closing
Date a certificate executed in its name by the President or a Vice President of
Income Fund, in form and substance satisfactory to U.S.
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<PAGE>
Government Fund and dated as of the Closing Date, to the effect that the
representations and warranties of Income Fund in this Agreement are true and
correct at and as of the Closing Date, except as they may be affected by the
transactions contemplated by this Agreement, and as to such other matters as
U.S. Government Fund shall reasonably request.
6.3 U.S. Government Fund shall have received on the Closing Date a favorable
opinion from Shereff, Friedman, Hoffman & Goodman, LLP, counsel to Income Fund,
dated as of the Closing Date, to the effect that:
6.3.1 Income Fund has been duly incorporated and is an existing corporation
in good standing under the laws of the State of Maryland;
6.3.2 This Agreement has been duly authorized, executed and delivered by
U.S. Government Fund and, assuming due authorization, execution and delivery
of the Agreement by U.S. Government Fund, is a valid and binding obligation
of Income Fund enforceable in accordance with its terms, subject to
bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and
similar laws of general applicability relating to or affecting creditors'
rights and to general equity principles and further subject to the
qualifications set forth in the next sentence. Such counsel may state that
they express no opinion as to the validity and enforceability of any
provision regarding choice of New York Law to govern this Agreement;
6.3.3 The shares of the Income Fund to be distributed to U.S. Government
Fund shareholders under this Agreement, assuming their due authorization and
delivery as contemplated by this Agreement, will be validly issued and
outstanding and fully paid and non-assessable, and no shareholder of Income
Fund has any pre-emptive right to subscribe therefor or purchase such
shares;
6.3.4 The execution and delivery of this Agreement did not, and the
consummation of the transactions contemplated hereby will not, (i) conflict
with Income Fund's Articles of Incorporation or By-Laws or (ii) result in a
default or a breach of (a) the Management Agreement dated July 1, 1988
between Income Fund and PMF, (b) the Custodian Contract dated July 31, 1990
between Income Fund and State Street (c) the Distribution Agreement with
respect to the Income Fund dated January 22, 1990 and amended and restated
as of April 13, 1995 between Income Fund and Prudential Mutual Fund
Distributors, Inc., (d) Distribution Agreements with respect to the Income
Fund (Class B and Class C shares) dated January 22, 1990 and amended and
restated April 13, 1995, and dated August 1, 1994 and amended and restated
April 13, 1995, respectively, between the Fund and Prudential Securities
Incorporated, and (e) the Transfer Agency and Service Agreement dated
January 1, 1988 as amended on July 31, 1990; provided, however, that such
counsel may state that they express no opinion in their opinion pursuant to
this paragraph 6.3.4 with respect to federal or state securities laws, other
antifraud laws and fraudulent transfer laws; provided further that insofar
as performance by Income Fund of its obligations under this Agreement is
concerned, such counsel may state that they express no opinion as to
bankruptcy, insolvency, reorganization, moratorium and similar laws of
general applicability relating to or affecting creditors' rights;
6.3.5 To the knowledge of such counsel, no consent, approval,
authorization, filing or order of any court or governmental authority is
required for the consummation by Income Fund of the transactions
contemplated herein, except such as have been obtained under the 1933 Act,
the 1934 Act and the Investment Company Act and such as may be required
under state Blue Sky or securities laws;
A-9
<PAGE>
6.3.6 Income Fund has been registered with the SEC as an investment
company, and, to the knowledge of such counsel, no order has been issued or
proceeding instituted to suspend such registration; and
6.3.7 Such counsel knows of no litigation or administrative proceeding
instituted or threatened against Income Fund that would be required to be
disclosed in the Registration Statement and is not so disclosed.
7. CONDITIONS PRECEDENT TO OBLIGATIONS OF INCOME FUND
The obligations of Income Fund to complete the transactions provided for
herein shall be subject to the performance by U.S. Government Fund of all the
obligations to be performed by it hereunder on or before the Closing Date and
the following further conditions:
7.1 All representations and warranties of U.S. Government Fund contained in
this Agreement shall be true and correct in all material respects as of the date
hereof and, except as they may be affected by the transactions contemplated by
this Agreement, as of the Closing Date with the same force and effect as if made
on and as of the Closing Date.
7.2 U.S. Government Fund shall have delivered to Income Fund on the Closing
Date a statement of its assets and liabilities, which statement shall be
prepared in accordance with generally accepted accounting principles
consistently applied, together with a list of its portfolio securities showing
the adjusted tax basis of such securities by lot, as of the Closing Date,
certified by the Treasurer of U.S. Government Fund.
7.3 U.S. Government Fund shall have delivered to Income Fund on the Closing
Date a certificate executed in its name by the President or a Vice President of
U.S. Government Fund, in form and substance satisfactory to Income Fund and
dated as of the Closing Date, to the effect that the representations and
warranties of U.S. Government Fund made in this Agreement are true and correct
at and as of the Closing Date except as they may be affected by the transactions
contemplated by this Agreement, and as to such other matters as Income Fund
shall reasonably request.
7.4 On or immediately prior to the Closing Date, U.S. Government Fund shall
have declared and paid to its shareholders of record one or more dividends
and/or other distributions so that it will have distributed substantially all
(and in any event not less than ninety-eight percent) of its investment company
taxable income (computed without regard to any deduction for dividends paid),
net tax-exempt interest income, if any, and realized net capital gain, if any,
for all taxable years through its liquidation.
7.5 Income Fund shall have received on the Closing Date a favorable opinion
from Shereff, Friedman, Hoffman & Goodman, LLP, counsel to U.S. Government Fund,
dated as of the Closing Date, to the effect that:
7.5.1 U.S. Government Fund is duly organized and validly existing as a
trust with transferable shares under Massachusetts law, with power under its
Declaration of Trust to own all of its properties and assets and, to the
knowledge of such counsel, to carry on its business as presently conducted;
7.5.2 This Agreement has been duly authorized, executed and delivered by
U.S. Government Fund and, assuming due authorization, execution and delivery
of the Agreement by Income Fund, is a valid and binding obligation of U.S.
Government Fund enforceable in accordance with its terms, subject to
bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and
similar laws of general applicability relating to or affecting creditors'
rights and to general equity principles and further subject
A-10
<PAGE>
to the qualifications set forth in the next succeeding sentence. Such
counsel may state that they express no opinion as to the validity or
enforceability of any provision regarding choice of New York Law to govern
this Agreement;
7.5.3 The execution and delivery of the Agreement did not, and the
performance by U.S. Government Fund of its obligations hereunder will not,
(i) violate U.S. Government Fund's Declaration of Trust or By-Laws or (ii)
result in a default or a breach of the Management Agreement, dated February
28, 1988, between U.S. Government Fund and PMF, the Custodian Agreement,
dated June 7, 1990, between U.S. Government Fund and State Street, the
Distribution Agreement (Class A shares), dated August 1, 1994, between U.S.
Government Fund and Prudential Mutual Fund Distributors, Inc., the
Distribution Agreement (Class B and Class C shares), dated August 1, 1994,
between U.S. Government Fund and Prudential Securities Incorporated, and the
Transfer Agency and Service Agreement, dated January 1, 1988, as amended
January 1, 1989 and January 1, 1990, between U.S. Government Fund and
Prudential Mutual Fund Services, Inc.; provided, however, that such counsel
may state that they express no opinion in their opinion pursuant to this
paragraph 7.5.3 with respect to federal or state securities laws, other
antifraud laws and fraudulent transfer laws; provided further that insofar
as performance by U.S. Government Fund of its obligations under this
Agreement is concerned, such counsel may state that they express no opinion
as to bankruptcy, insolvency, fraudulent transfer, reorganization,
moratorium and similar laws of general applicability relating to or
affecting creditors' rights and to general equity principles;
7.5.4 To the knowledge of such counsel, no consent, approval,
authorization, filing or order of any court or governmental authority is
required for the consummation by U.S. Government Fund of the transactions
contemplated herein, except such as have been obtained under the 1933 Act,
the 1934 Act and the Investment Company Act and such as may be required
under state Blue Sky or securities laws;
7.5.5 Such counsel knows of no litigation or any governmental proceeding
instituted or threatened against U.S. Government Fund that would be required
to be disclosed in the Registration Statement and is not so disclosed; and
7.5.6 U.S. Government Fund has been registered with the SEC as an
investment company, and, to the knowledge of such counsel, no order has been
issued or proceeding instituted to suspend such registration.
Such opinion may rely on an opinion of Massachusetts counsel to the extent
it addresses Massachusetts law.
8. FURTHER CONDITIONS PRECEDENT TO OBLIGATIONS OF INCOME FUND AND U.S.
GOVERNMENT FUND
The obligations of each Fund hereunder are subject to the further conditions
that on or before the Closing Date:
8.1 This Agreement and the transactions contemplated herein shall have been
approved by the requisite vote of (a) the Trustees/Directors of U.S. Government
Fund and Income Fund, as to the determinations set forth in Rule 17a-8(a) under
the Investment Company Act, (b) the Directors of Income Fund as to the
assumption by Income Fund of the liabilities of U.S. Government Fund and (c) the
holders of the outstanding shares of U.S. Government Fund in accordance with the
provisions of U.S. Government Fund's Declaration of Trust, and certified copies
of the resolutions evidencing such approvals shall have been delivered to Income
Fund and U.S. Government Fund.
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<PAGE>
8.2 Any proposed change to Income Fund's operations that may be approved by the
Board of Directors of Income Fund subsequent to the date of this Agreement but
in connection with and as a condition to implementing the transactions
contemplated by this Agreement, for which the approval of Income Fund
shareholders is required pursuant to the Investment Company Act or otherwise,
shall have been approved by the requisite vote of the holders of the outstanding
shares of the Income Fund in accordance with the Investment Company Act and the
provisions of the Articles of Incorporation of Income Fund, and certified copies
of the resolution evidencing such approval shall have been delivered to U.S.
Government Fund.
8.3 On the Closing Date no action, suit or other proceeding shall be pending
before any court or governmental agency in which it is sought to restrain or
prohibit, or obtain damages or other relief in connection with, this Agreement
or the transactions contemplated herein.
8.4 All consents of other parties and all consents, orders and permits of
federal, state and local regulatory authorities (including those of the SEC and
of state Blue Sky or securities authorities, including "no-action" positions of
such authorities) deemed necessary by Income Fund or U.S. Government Fund to
permit consummation, in all material respects, of the transactions contemplated
hereby shall have been obtained, except where failure to obtain any such
consent, order or permit would not involve a risk of a material adverse effect
on the assets or properties of Income Fund or U.S. Government Fund, provided
that either party hereto may for itself waive any part of this condition.
8.5 The Registration Statement shall have become effective under the 1933 Act,
and no stop orders suspending the effectiveness thereof shall have been issued,
and to the best knowledge of the parties hereto, no investigation or proceeding
under the 1933 Act for that purpose shall have been instituted or be pending,
threatened or contemplated.
8.6 U.S. Government Fund and Income Fund shall have received on or before the
Closing Date a private letter ruling from the Internal Revenue Service, or an
opinion of Shereff, Friedman, Hoffman & Goodman, LLP, satisfactory to U.S.
Government Fund and to Income Fund, substantially to the effect that for federal
income tax purposes:
8.6.1 The acquisition by Income Fund of the assets of U.S. Government Fund
in exchange solely for voting shares of the Income Fund and the assumption
by the Income Fund of U.S. Government Fund's liabilities, if any, followed
by the distribution of the Income Fund's voting shares by U.S. Government
Fund pro rata to its shareholders, pursuant to its liquidation and
constructively in exchange for their U.S. Government Fund shares, will
constitute a reorganization within the meaning of Section 368(a)(1)(C) of
the Internal Revenue Code, and U.S. Government Fund and Income Fund each
will be "a party to a reorganization" within the meaning of Section 368(b)
of the Internal Revenue Code;
8.6.2 U.S. Government Fund's shareholders will recognize no gain or loss
upon the constructive exchange of all of their shares of U.S. Government
Fund solely for shares of the Income Fund in complete liquidation of U.S.
Government Fund;
8.6.3 No gain or loss will be recognized to U.S. Government Fund upon the
transfer of its assets to Income Fund in exchange solely for shares of the
Income Fund and the assumption by Income Fund of U.S. Government Fund's
liabilities, if any, and the subsequent distribution of those shares to U.S.
Government Fund shareholders in complete liquidation of U.S. Government
Fund;
8.6.4 No gain or loss will be recognized to Income Fund upon the
acquisition of U.S. Government Fund's assets in exchange solely for shares
of Income Fund and the assumption of U.S. Government Fund's liabilities, if
any;
A-12
<PAGE>
8.6.5 Income Fund's basis for those assets will be the same as the basis
thereof when held by U.S. Government Fund immediately before the transfer,
and the holding period of such assets acquired by Income Fund will include
the holding period thereof when held by U.S. Government Fund;
8.6.6 U.S. Government Fund shareholders' basis for the shares of Income
Fund to be received by them pursuant to the reorganization will be the same
as their basis for the shares of U.S. Government Fund to be constructively
surrendered in exchange thereof; and
8.6.7 The holding period of Income Fund shares to be received by U.S.
Government Fund shareholders will include the period during which U.S.
Government Fund shares to be constructively surrendered in exchange therefor
were held; provided such U.S. Government Fund shares were held as capital
assets by those shareholders on the date of the exchange.
9. FINDER'S FEES AND EXPENSES
9.1 Each Fund represents and warrants to the other that there are no finder's
fees payable in connection with the transactions provided for herein.
9.2 The expenses incurred in connection with the entering into and carrying out
of the provisions of this Agreement shall be allocated to the Funds pro rata in
a fair and equitable manner in proportion to their respective assets.
10. ENTIRE AGREEMENT; SURVIVAL OF WARRANTIES
10.1 This Agreement constitutes the entire agreement between the Funds.
10.2 The representations, warranties and covenants contained in this Agreement
or in any document delivered pursuant hereto or in connection herewith shall
survive the consummation of the transactions contemplated hereunder.
11. TERMINATION
Either Fund may at its option terminate this Agreement at or prior to the
Closing Date because of:
11.1 A material breach by the other of any representation, warranty or covenant
contained herein to be performed at or prior to the Closing Date; or
11.2 A condition herein expressed to be precedent to the obligations of either
party not having been met and it reasonably appearing that it will not or cannot
be met; or
11.3 A mutual written agreement of U.S. Government Fund and Income Fund.
In the event of any such termination, there shall be no liability for
damages on the part of either Fund (other than the liability of the Funds to pay
their allocated expenses pursuant to paragraph 9.2) or any Director/Trustee or
officer of Income Fund or U.S. Government Fund.
12. AMENDMENT
This Agreement may be amended, modified or supplemented only in writing by
the parties; provided, however, that following the shareholders' meeting called
by U.S. Government Fund pursuant to paragraph 5.2, no such amendment may have
the effect of changing the provisions for determining the number of shares of
the Income Fund to be distributed to U.S. Government Fund shareholders under
this Agreement to the detriment of such shareholders without their further
approval.
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<PAGE>
13. NOTICES
Any notice, report, demand or other communication required or permitted by
any provision of this Agreement shall be in writing and shall be given by hand
delivery, or prepaid certified mail or overnight service addressed to Prudential
Mutual Fund Management, Inc., One Seaport Plaza, New York, New York 10292,
Attention: S. Jane Rose.
14. HEADINGS; COUNTERPARTS; GOVERNING LAW; ASSIGNMENT
14.1 The paragraph headings contained in this Agreement are for reference
purposes only and shall not affect in any way the meaning or interpretation of
this Agreement.
14.2 This Agreement may be executed in any number of counterparts, each of
which will be deemed an original.
14.3 This Agreement shall be governed by and construed in accordance with the
laws of the State of New York.
14.4 This Agreement shall bind and inure to the benefit of the parties and
their respective successors and assigns, and no assignment or transfer hereof or
of any rights or obligations hereunder shall be made by either party without the
written consent of the other party. Nothing herein expressed or implied is
intended or shall be construed to confer upon or give any person, firm or
corporation other than the parties and their respective successors and assigns
any rights or remedies under or by reason of this Agreement.
15. NO LIABILITY OF SHAREHOLDERS OR TRUSTEES OF U.S. GOVERNMENT FUND
The name "Prudential U.S. Government Fund" is the designation of the
Trustees from time to time acting under an Amended and Restated Declaration of
Trust dated September 27, 1994, as the same may be from time to time amended.
Income Fund acknowledges that it must look, and agrees that it shall look,
solely to the assets of U.S. Government Fund for the enforcement of any claims
arising out of or based on the obligations of U.S. Government Fund hereunder,
and in particular that none of the Trustees, officers, agents or shareholders of
U.S. Government Fund assume or shall have any personal liability for obligations
of U.S. Government Fund hereunder.
IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
executed by the President or Vice President of each Fund.
Prudential U.S. Government Fund
By _____________________________________________
PRESIDENT/VICE PRESIDENT
Prudential Government Income Fund, Inc.
By _____________________________________________
PRESIDENT/VICE PRESIDENT
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<PAGE>
APPENDIX B
INSERT GOVERNMENT INCOME FUND
SEMI-ANNUAL REPORT AS APPENDIX B
[TO COME]
B-1
<PAGE>
APPENDIX C
Letter to Shareholders
June 12, 1995
Dear Shareholder:
Powered by the dramatic bond market rally in 1995, the Prudential U.S.
Government Fund has regained much of the ground it lost last year. Over
the past six months bonds have earned coupon income, which is higher than
last year, plus some capital appreciation as prices rose. We are pleased
to report the Fund has significantly outperformed the average general U.S.
government fund as measured by Lipper Analytical Services. That's primarily
due to the Fund's longer average maturity, which provided greater price gains
as interest rates fell.
[ GRAPH ]
Source: Prudential Mutual Fund Management,
Inc. U.S. Stocks: S&P 500; U.S. Bonds:
Lehman Brothers government/corporate
aggregate; Municipal bonds: Lehman Bros.
Municipal Bond Index; and Money Markets:
IBC/Donoghue taxable funds average. Note:
Total return figures are for the 12-month
period ended 4/30/95 and assume reinvestment
of dividends and distributions. All bond
returns are market value weighted inclusive
of accrued interest. This chart is for
comparison purposes only. There are different
risks associated with each investment sector
which should be considered carefully before
investing. Past performance is not indicative
of future results.
<TABLE>
CUMULATIVE TOTAL RETURNS
*As of 4/30/95
<CAPTION>
Since
6 mos 1 Year 5 Years Inception**
<S> <C> <C> <C> <C>
Class A 8.1% 6.6% 53.1% 47.8%
Class B 7.8% 5.7% 47.0% 69.6%
Class C 7.8% N/A N/A 4.7%
Lipper U.S. Gvt. 5.4% 5.3% 48.8% N/A
Fund Average***
</TABLE>
<TABLE>
AVERAGE ANNUAL TOTAL RETURNS*
As of 3/31/95
<CAPTION>
1 Year 5 Years Since Inception2
<S> <C> <C> <C>
Class A 2.3% 6.1% 6.9%
Class B 0.7% 7.9% 6.4%
Class C N/A N/A 3.7%
</TABLE>
An investment in the Fund is neither insured nor guaranteed by the U.S.
Government. Past performance is no guarantee of future results. Investment
return and principal value will fluctuate so that an investor's shares, when
redeemed, may be worth more or less than their original cost.
N/A -- Not applicable.
*** Source: Prudential Mutual Fund Management, Inc. and Lipper Analytical
Services, Inc. Cumulative total returns do not take into account sales
charges. The average annual returns do take into account applicable sales
charges.The Fund charges a maximum front-end sales load of 4% for Class A
shares. Class B shares are subject to a declining contingent deferred
sales charge (CDSC) of 5%, 4%, 3%, 2%, 1% and 1%, for six years. Class
C shares have a 1% CDSC for one year. Class B shares will automatically
convert to Class A shares on a quarterly basis, after approximately seven
years.
*** Inception of Class A is 1/22/90; Class B is 11/7/86; Class C is 8/1/94.
*** These are average returns of 173 funds for six months; 150 funds for
one year and 89 funds for five years.
C-1
<PAGE>
Senate Considers
"Dream Account"
The U.S. Senate will soon be considering
a tax-deferred savings vehicle called the
"American Dream Savings Account," which was
approved by the House of Representatives
earlier in the year as part of the "Contract
with America" legislative agenda.
While similar to a traditional individual
retirement account or IRA, the American
Dream Savings Account goes further by raising
the contribution ceiling for non-working
spouses and permitting tax-free and penalty-free
withdrawals prior to age 59 1/2for certain
major expenses. Prudential Mutual Funds
supports the American Dream Savings Account
and we urge you to share your opinion with
your legislators.
Our Objective.
The Prudential U.S. Government Fund seeks to provide high total return
through a combination of capital appreciation plus high current income
by investing primarily in U.S. government securities and obligations
issued or guaranteed by U.S. government agencies or instrumentalities.
It may also invest up to 35% of its assets in corporate bonds and other
debt securities. The Fund had an effective maturity of about 8.9 years
on April 30, 1995.
New Manager.
Barbara L. Kenworthy, who manages the Prudential Government Income Fund
and the Prudential Diversified Bond Fund, has taken over management of
the Prudential U.S. Government Fund. Barbara joined The Prudential in
1994 after a distinguished career as a portfolio manager and president
of several taxable fixed-income funds for the Dreyfus Corp.
1995 Opened With A Stunning Bond Rally.
An extraordinary rally swept through the bond market in the first four
months of this year, its best showing since 1991. Investor sentiment
turned around on speculation that the Federal Reserve's efforts to slow
the economy and keep inflation under control had finally succeeded.
Since February 1994, the Federal Reserve has doubled short-term interest
rates, to 6% from 3%, hoping to slow the economy down to a more moderate,
sustainable growth rate: what economists consider a "soft landing."
Investors were heartened in late April when the government announced
that the economy had grown at an annualized rate of 2.8% in the first
quarter, much lower than last year's 4.1% rate. If the economy continues
to grow at this pace, or slower, market participants believe the Federal
Reserve will keep short-term interest rates steady, or perhaps even
lower them.
(GRAPH)
Last year, when the Federal Reserve raised short-term interest rates,
the bond market forced longer term interest rates higher as well. The
benchmark 30-year U.S. Treasury yield reached a peak of nearly 8.2% in
November, then began to fall in December, reaching 7.3% on April 30, the
close of our
C-2
<PAGE>
reporting period. Since then, the yield has fallen below 7%.
Of course, as yields fall, bond prices rise, and vice versa.
Fund Update
Starting in February 1995, Class B shareholders may have begun to notice
a change in their Fund holdings. That's when Class B shares began to
automatically convert to Class A shares, on a quarterly basis, approximately
seven years after purchase. As you may know, Class A shares generally carry
lower annual distribution expenses than Class B shares. Accordingly, after
conversion as a Class A shareholder, you will earn higher total returns on
your investment than you would have as a Class B shareholder.
Conversions of eligible Class B shares and special exchanges of Class B and
C shares will take place each calendar quarter (March, June, September and
December) starting in September 1995.
Inflation Fears Diminished.
Inflation fears have dimmed considerably thus far this year. Investors spent
much of 1994 looking for higher inflation, but it appears at this writing that
the Federal Reserve may have contained the threat by raising short-term
interest rates. Inflation remains below 3% with few price pressures in
sight. The Consumer Price Index (CPI), one measure of inflation, has
remained in a range of 2.5% to 2.9% throughout the year, and wages (another
leading indicator) have remained flat. With economic growth now slowing,
we don't expect wage or price pressures to develop any time soon.
Longer Maturity Enhanced Performance.
The Fund is positioned with an effective maturity which is about one-third
longer than most of its competitors. Our longer maturity helped the Fund
perform significantly better than its peers as long-term interest rates fell
over the last six months. Should interest rates rise, however, this longer
maturity will detract from the Fund's performance. So we have gradually
reduced the maturity of the Fund to 8.9 years as of April 30, 1995.
The Fund's longer maturity also enables it to offer a higher yield than
shorter maturity government bond funds. Class A, B and C shares offered
30-day SEC yields of 6.2%. 5.7% and 5.8% as of April 30, up from 5.9% for
Class A shares and 5.5% for Class B shares a year earlier (Class C shares
have not yet been in existence for one year).
We Restructured The Portfolio to Profit From the Rally.
As bond prices rose early in 1995, we took profits by gradually selling
our corporate bond position, which had represented about 20% of the Fund.
We reinvested the proceeds in mortgage backed securities and A-rated CMOs
(collateralized mortgage obligations). Since we expect the economy to
continue to slow in the coming months, selected mortgages should offer more
stability than corporates, which can fall in value should corporate profits
or the economy slow unexpectedly. As of April 30, the CMOs were yielding
close to two percentage points higher than comparable U.S. Treasurys.
We also hold 27% of assets in 30-year mortgage pass-throughs, mostly GNMAs
with 7% coupons, but some FNMAs with 8.5% and 9% coupons.
The Advantage of "Staying the Course"
Past performance doesn't guarantee future results, but we can certainly
learn from it. While there is a tremendous temptation to sell fund shares
when prices fall, we've counseled shareholders over the years to stay the
course and invest for the long term (five years or more). A shareholder who
followed this philosophy during the difficult days of 1994 would have
C-3
<PAGE>
recouped much of the Fund's NAV decline and received a higher stream of income.
Statistically, we can show this for the broad market by looking at the Lehman
Brothers U.S. Government Bond Index, a widely recognized barometer of bond
prices. In all of 1994, the index lost 3.4% on a total return basis
(including interest). In the first four months of 1995, the index has
gained 6.1% in total return. (For the past 12 months, the index has gained
6.5% in total return.) Clearly, the long-term investor who stayed the course
would have recovered from last year.
The Outlook.
Bonds have appreciated substantially in 1995. Certainly we don't expect the
market to perform for the entire year the way it has for the first four
months, but there may be room for some modest capital appreciation later
this year.
We have shortened our maturities slightly, expecting that bond prices may
dip slightly after the rally. We're also emphasizing intermediate- to
long-term bonds with attractive yields. We believe they offer the best
value because we think bond yields will remain fairly flat or decline slightly
later this year.
As always, it is a pleasure to work for you. We appreciate the confidence
you have shown in us by choosing the Prudential U.S. Government Fund.
Sincerely,
/s/ Barbara L. Kenworthy
Barbara L. Kenworthy
Portfolio Manager
/s/ Richard A. Redeker
Richard A. Redeker
President
C-4
<PAGE>
PORTFOLIO Q&A
(PICTURE)
Dennis Bushe
The bond market has been a strong performer in the first four months of 1995.
If you are contemplating putting cash into the bond market, you might want to
consider some of the following points. We talked with Prudential Mutual Funds
chief fixed-income strategist Dennis Bushe about why bonds and bond mutual
funds may make some sense in today's investment environment.
Q. What are the prospects for bonds for the rest of 1995?
A. I believe bonds will perform well over the remainder of the year, although
I do not expect to see the same kind of price appreciation we saw in the first
four months. That's because interest rates have already fallen dramatically
this year. For example, the yield on the 30-year Treasury bond has declined
by more than one percentage point since reaching its peak last November. But
as long as the economy maintains a sustainable growth rate of 2.5% or lower,
bonds should provide coupon income and possibly a modest amount of capital
appreciation. And municipal bond supply is very low right now -- if that
scenario continues, it could help prices rise. The principal risk to this
outlook would be an acceleration of the U.S. economy, which could put upward
pressure on interest rates.
Q. What is a flat tax and why are municipal bond investors worried about it?
A. Congress is considering a move to simplify the income tax code by
implementing a "flat" tax or an income tax at a single, flat rate rather
than the different tax brackets in existence now. Most tax deductions would
be disallowed under the proposal, including municipal bond income. Therefore,
under this proposal, municipal bond income would not be as valuable as it
currently is for individuals in the higher tax brackets. I believe there is
little chance such a proposal could pass Congress, certainly not before the
1996 elections. However, I do expect municipal bond prices will be very
sensitive to any proposal designed to drastically reduce the federal income
tax paid by the nation's wealthier individuals. Municipal bond investors
should be prepared to weather some volatility this year as a consequence.
C-5
<PAGE>
PRUDENTIAL U.S. GOVERNMENT FUND Portfolio of Investments
April 30, 1995 (Unaudited)
<TABLE>
<CAPTION>
Principal
Amount Value
(000) Description (Note 1)
<C> <S> <C>
LONG-TERM INVESTMENTS--92.3%
Mortgage-Related Securities--42.0%
Chase Mortgage Finance Corp.,
Series 1994-1, Class B-1,
$ 3,620 7.869%, 11/25/25 (CMO).......... $ 3,381,020
Federal National Mortgage
Assoc.,
6,933 8.50%, 7/1/17 - 2/1/25.......... 7,044,088
6,965 9.00%, 8/1/24 - 4/1/25.......... 7,182,661
Government National Mortgage
Assoc.,
20,839 7.00%, 4/15/24.................. 19,725,192
Prudential Home Mortgage
Securities Co.,
Series 1995-A, Class B-2,
5,000 8.68%, 3/28/25 (CMO)............ 4,939,844
Resolution Trust Corp.,
Series 1994-1, Class B-2,
5,962 7.75%, 9/25/29 (CMO)............ 5,682,684
Structured Asset Securities
Corp.,
Series 1995-C1, Class C,
5,000 7.375%, 9/25/24 (CMO)........... 4,565,000
------------
Total mortgage-related
securities
(cost $51,846,573).............. 52,520,489
------------
U.S. Treasury Securities--35.6%
U.S. Treasury Bond,
5,000 8.125%, 8/15/19................. 5,353,900
U.S. Treasury Notes,
3,000 6.875%, 2/28/97................. 3,015,000
6,000 7.25%, 2/15/98.................. 6,082,500
4,000 5.00%, 1/31/99.................. 3,762,480
1,000 6.375%, 8/15/02................. 964,220
24,000 7.875%, 11/15/04................ 25,312,560
------------
Total U. S. treasury securities
(cost $43,447,441).............. 44,490,660
------------
U.S. Government Agency
Stripped Security--9.9%
Federal National Mortgage
Assoc.,
Zero Coupon, 7/5/14
$55,000 (cost $11,633,935).............. $ 12,357,950
------------
Corporate Bond--4.8%
Bellaire Finance Inc.,
9.32%, 2/1/08
5,800 (cost $6,005,719)............... 5,992,125
------------
Total long-term investments
(cost $112,933,668)............. 115,361,224
------------
SHORT-TERM INVESTMENT--7.3%
Joint Repurchase Agreement
Account,
5.93%, 5/1/95, (Note 5)
9,086 (cost $9,086,000)............... 9,086,000
------------
Total Investments--99.6%
(cost $122,019,668; Note 4)..... 124,447,224
Other assets in excess of
liabilities--0.4%............... 490,431
------------
Net Assets--100%................ $124,937,655
------------
------------
</TABLE>
- ---------------
CMO--Collateralized Mortgage Obligation.
C-6 See Notes to Financial Statements.
<PAGE>
PRUDENTIAL U.S. GOVERNMENT FUND
Statement of Assets and Liabilities
(Unaudited)
<TABLE>
<CAPTION>
Assets April 30, 1995
--------------
<S> <C>
Investments, at value (cost $122,019,668)...................................................... $124,447,224
Cash........................................................................................... 32,523
Receivable for investments sold................................................................ 4,432,888
Interest receivable............................................................................ 1,587,404
Receivable for Fund shares sold................................................................ 129,585
Deferred expenses and other assets............................................................. 5,531
--------------
Total assets................................................................................. 130,635,155
--------------
Liabilities
Payable for investments purchased.............................................................. 4,552,083
Payable for Fund shares reacquired............................................................. 818,684
Dividends payable.............................................................................. 161,774
Distribution fee payable....................................................................... 62,567
Management fee payable......................................................................... 51,967
Accrued expenses............................................................................... 50,425
--------------
Total liabilities............................................................................ 5,697,500
--------------
Net Assets..................................................................................... $124,937,655
--------------
--------------
Net assets were comprised of:
Shares of beneficial interest, at par........................................................ $ 130,156
Paid-in capital in excess of par............................................................. 137,485,933
--------------
137,616,089
Accumulated net realized loss on investments................................................. (15,105,990)
Net unrealized appreciation on investments................................................... 2,427,556
--------------
Net assets, April 30, 1995................................................................... $124,937,655
--------------
--------------
Class A:
Net asset value and redemption price per share
($44,427,303 / 4,629,198 shares of beneficial interest issued and outstanding)............. $ 9.60
Maximum sales charge (4.0% of offering price)................................................ .40
Maximum offering price to public............................................................. $10.00
--------------
--------------
Class B:
Net asset value, offering price and redemption price per share
($80,379,639 / 8,372,750 shares of beneficial interest issued and outstanding)............. $ 9.60
--------------
--------------
Class C:
Net asset value, offering price and redemption price per share
($130,713 / 13,616 shares of beneficial interest issued and outstanding)................... $ 9.60
--------------
--------------
</TABLE>
See Notes to Financial Statements.
C-7
<PAGE>
PRUDENTIAL U.S. GOVERNMENT FUND
Statement of Operations
(Unaudited)
<TABLE>
<CAPTION>
Six Months
Ended
April 30,
Net Investment Income 1995
-----------
<S> <C>
Income
Interest and discount earned........... $ 4,913,814
-----------
Expenses
Distribution fee--Class A.............. 18,026
Distribution fee--Class B.............. 434,832
Distribution fee--Class C.............. 343
Management fee......................... 316,098
Transfer agent's fees.................. 134,000
Custodian's fees....................... 51,000
Registration fees...................... 31,000
Reports to shareholders................ 30,000
Trustees' fees......................... 27,000
Audit fee.............................. 15,000
Legal fees............................. 12,000
Miscellaneous.......................... 5,206
-----------
Total expenses....................... 1,074,505
-----------
Net investment income.................... 3,839,309
-----------
Net Realized and Unrealized
Gain (Loss) on Investments
Net realized loss on investment
transactions........................... (4,051,149)
Net change in unrealized
appreciation/depreciation on
investments............................ 9,906,280
-----------
Net gain on investments.................. 5,855,131
-----------
Net Increase in Net Assets
Resulting from Operations................ $ 9,694,440
-----------
-----------
</TABLE>
PRUDENTIAL U.S. GOVERNMENT FUND
Statement of Changes in Net Assets
(Unaudited)
<TABLE>
<CAPTION>
Six Months Year
Ended Ended
Increase (Decrease) April 30, October 31,
in Net Assets 1995 1994
------------ ------------
<S> <C> <C>
Operations
Net investment income..... $ 3,839,309 $ 8,705,238
Net realized loss on
investment transactions.. (4,051,149) (1,123,882)
Net change in unrealized
appreciation/depreciation
on investments.......... 9,906,280 (21,394,608)
------------ ------------
Net increase (decrease) in
net assets resulting from
operations.............. 9,694,440 (13,813,252)
------------ ------------
Dividends to shareholders
from net investment income
(Note 1)
Class A................... (796,859) (450,567)
Class B................... (3,039,680) (8,254,322)
Class C................... (2,770) (349)
------------ ------------
(3,839,309) (8,705,238)
------------ ------------
Fund share transactions (net
of share conversions)
(Note 6)
Net proceeds from shares
sold.................... 13,251,549 39,812,693
Net asset value of shares
issued in reinvestment
of dividends............ 2,482,464 5,677,995
Cost of shares
reacquired.............. (27,567,934) (65,811,259)
------------ ------------
Net decrease in net assets
from Fund share
transactions............ (11,833,921) (20,320,571)
------------ ------------
Total decrease.............. (5,978,790) (42,839,061)
Net Assets
Beginning of period......... 130,916,445 173,755,506
------------ ------------
End of period............... $124,937,655 $130,916,445
------------ ------------
------------ ------------
</TABLE>
See Notes to Financial Statements. See Notes to Financial Statements.
C-8
<PAGE>
PRUDENTIAL U.S. GOVERNMENT FUND
Notes to Financial Statements
(Unaudited)
Prudential U.S. Government Fund (the ``Fund'') was organized as a
Massachusetts business trust on September 22, 1986. Investment operations
commenced on November 7, 1986. The Fund's primary investment objective is to
seek a high total return, capital appreciation plus high current income,
primarily through investment in U.S. Government securities and obligations
issued or guaranteed by U.S. Government agencies or instrumentalities. The
ability of issuers of debt securities, other than those issued or guaranteed by
the U.S. Government, may be affected by economic developments in a specific
industry or region.
Note 1. Accounting The following is a summary
Policies of significant accounting poli-
cies followed by the Fund in the preparation of
its financial statements.
Security Valuation: The Board of Trustees has authorized the use of an
independent pricing service to determine valuations for normal institutional
size trading units of securities. The pricing service considers such factors as
security prices, yields, maturities, call features, ratings and developments
relating to specific securities in arriving at securities valuations. Options
and financial futures contracts listed on exchanges are valued at their closing
price on the applicable exchange. When market quotations are not readily
available, a security is valued at fair value as determined in good faith by or
under the direction of the Board of Trustees.
Short-term securities which mature in more than 60 days are valued at current
market quotations. Short-term securities which mature in 60 days or less are
valued at amortized cost which approximates market value.
All securities are valued as of 4:15 P.M., New York time.
In connection with transactions in repurchase agreements, it is the Fund's
policy that its custodian or designated subcustodians, as the case may be under
triparty repurchase agreements, take possession of the underlying collateral
securities, the value of which exceeds the principal amount of the repurchase
transaction, including accrued interest. To the extent that any repurchase
transaction exceeds one business day, the value of the collateral is
marked-to-market on a daily basis to ensure the adequacy of the collateral. 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.
Dollar Rolls: The Fund enters into dollar rolls in which the Fund sells
securities for delivery in the current month and simultaneously contracts to
repurchase somewhat similar 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.
Securities Transactions and Investment Income: Securities transactions are
recorded on the trade date. Realized gains or losses on sales of investments are
calculated on the identified cost basis. Interest income is recorded on the
accrual basis.
Net investment income, other than distribution fees, and unrealized and
realized gains or losses are allocated daily to each class of shares based upon
the relative proportion of net assets of each class at the beginning of the day.
Federal Income Taxes: It is the Fund's policy to continue to meet the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute all of its taxable net income to its shareholders.
Therefore, no federal income tax provision is required.
Dividends and Distributions: Dividends from net investment income are accrued
daily and payable monthly. The Fund will distribute annually any net realized
capital gains in excess of capital loss carryforwards, if any. Dividends and
distributions are recorded on the ex-dividend date.
Income distributions and capital gains distributions are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles.
Note 2. Agreements The Fund has a management
agreement with Prudential Mutual Fund Management,
Inc. (``PMF''). Pursuant to this agreement, PMF has responsibility for all
investment advisory services and supervises the subadviser's performance of such
services. PMF has entered into a subadvisory agreement with The Prudential
Investment Corporation (``PIC''); PIC furnishes investment advisory services in
connection with the management of the Fund. PMF pays for the cost of the
subadviser's services, the compensation of officers of the Fund, occupancy and
certain clerical and bookkeeping costs of the Fund. The Fund bears all other
costs and expenses.
C-9
<PAGE>
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 and Class C shares of the Fund (collectively
the ``Distributors''). The Fund compensates the Distributors for distributing
and servicing the Fund's Class A, Class B and C shares, pursuant to plans of
distribution, (the ``Class A, B and C Plans'') regardless of expenses actually
incurred by them. The distribution fees are accrued daily and payable monthly.
Pursuant to the Class A , B and C Plans, the Fund compensates the
Distributors for distribution-related activities at an annual rate of up to .30
of 1%, 1% and 1%, of the average daily net assets of the Class A, B and C
shares, respectively. Such expenses under the Plans were .15 of 1%, .85 of 1%
and .75 of 1% of the average daily net assets of Class A, B and C shares,
respectively, for the six months ended April 30, 1995.
PMFD has advised the Fund that it has received approximately $27,100 in
front-end sales charges resulting from sales of Class A shares during the six
months ended April 30, 1995. From these fees, PMFD paid such sales charges to
PSI and Pruco Securities Corporation, affiliated broker-dealers, which in turn
paid commissions to sales persons and incurred other distribution costs.
PSI has advised the Fund that for the six months ended April 30, 1995, it
received approximately $224,500 in contingent deferred sales charges imposed
upon certain redemptions by Class B and Class C shareholders.
PMFD is a wholly-owned subsidiary of PMF; PSI, PMF and PIC are indirect,
wholly-owned subsidiaries of The Prudential Insurance Company of America.
Note 3. Other Prudential Mutual Fund Ser-
Transactions vices, Inc. (``PMFS''), a
with Affiliates wholly-owned subsidiary of
PMF, serves as the Fund's transfer agent. During
the six months ended April 30, 1995, the Fund incurred fees of approximately
$102,400 for the services of PMFS. As of April 30, 1995, approximately $18,600
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 Purchases and sales of invest-
Securities ment securities, other than
short-term investments, for the six months ended
April 30, 1995 were $206,391,094 and $220,658,925, respectively.
The federal income tax basis of the Fund's investments at April 30, 1995 was
substantially the same as the basis for financial statement reporting purposes
and, accordingly, net unrealized appreciation of investments for federal income
tax purposes was $2,427,556 (gross unrealized appreciation-$2,450,999; gross
unrealized depreciation-$23,443).
For federal income tax purposes, the Fund had a capital loss carryforward as
of October 31, 1994 of approximately $11,054,800 of which $1,017,200 expires in
1997, $8,301,600 expires in 1998 and $1,736,000 expires in 2002. Accordingly, no
capital gains distribution is expected to be paid to shareholders until net
gains have been realized in excess of such carryforward.
Note 5. Joint The Fund, along with other
Repurchase affiliated registered invest-
Agreement ment companies, transfers
Account 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 April 30, 1995, the Fund
has a 1.35% undivided interest in the repurchase agreements in the joint
account. The undivided interest for the Fund represents $9,086,000 in principal
amount. As of such date, each repurchase agreement in the joint account and the
value of the collateral therefor were as follows:
Bear, Stearns & Co., 5.92%, in the principal amount of $125,000,000,
repurchase price $125,061,667, due 5/1/95. The value of the collateral including
accrued interest is $127,647,875.
UBS Securities Inc., 5.93%, in the principal amount of $100,000,000,
repurchase price $100,049,417, due 5/1/95. The value of the collateral including
accrued interest is $102,001,215.
Morgan Stanley and Co., Inc., 5.93%, in the principal amount of $225,000,000,
repurchase price $225,111,188, due 5/1/95. The value of the collateral including
accrued interest is $229,982,534.
CS First Boston Corp., 5.93%, in the principal amount of $225,000,000,
repurchase price $225,111,188, due 5/1/95. The value of the collateral including
accrued interest is $229,725,279.
Note 6. Capital The Fund offers Class A,
Class B and Class C shares. Class A shares are
sold with a front-end sales charge of up to 4.0%. Class B shares are sold with a
contingent deferred sales charge which declines from 5% to zero depending on
C-10
<PAGE>
the period of time the shares are held. Class C shares are sold with a
contingent deferred sales charge of 1% during the first year. Commencing in
February 1995, Class B shares will automatically convert to Class A shares on a
quarterly basis approximately seven years after purchase. A special exchange
priviledge is also available for shareholders who qualified to purchase Class A
shares at net asset value.
The Fund has authorized an unlimited number of shares of beneficial interest
of each class at $.01 par value. Transactions in shares of beneficial interest
for the six months ended April 30, 1995 and for the fiscal year ended October
31, 1994 were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- -------------------------------- -------------- ------------
<S> <C> <C>
Six months ended April 30, 1995:
Shares sold..................... 249,512 $ 2,331,320
Shares issued in reinvestment of
dividends..................... 47,755 451,454
Shares reacquired............... (340,177) (3,206,575)
-------------- ------------
Net decrease in shares
outstanding before
conversion.................... (42,910) (423,801)
Shares issued upon conversion
from Class B.................. 3,932,258 36,923,615
-------------- ------------
Net increase in shares
outstanding................... 3,889,348 $ 36,499,814
-------------- ------------
-------------- ------------
Year ended October 31, 1994:
Shares sold..................... 359,574 $ 3,519,655
Shares issued in reinvestment of
dividends..................... 31,480 306,085
Shares reacquired............... (297,934) (2,879,593)
-------------- ------------
Net increase in shares
outstanding................... 93,120 $ 946,147
-------------- ------------
-------------- ------------
<CAPTION>
Class B
- --------------------------------
<S> <C> <C>
Six months ended April 30, 1995:
Shares sold..................... 1,166,750 $ 10,821,937
Shares issued in reinvestment of
dividends..................... 218,515 2,028,773
Shares reacquired............... (2,623,590) (24,340,961)
-------------- ------------
Net decrease in shares
outstanding before
conversion.................... (1,238,325) (11,490,251)
Shares reaquired upon conversion
into Class A.................. (3,932,258) (36,923,615)
-------------- ------------
Net decrease in shares
outstanding................... (5,170,583) $(48,413,866)
-------------- ------------
-------------- ------------
Year ended October 31, 1994:
Shares sold..................... 3,633,315 $ 36,246,363
Shares issued in reinvestment of
dividends..................... 550,260 5,371,630
Shares reacquired............... (6,392,542) (62,931,666)
-------------- ------------
Net decrease in shares
outstanding................... (2,208,967) $(21,313,673)
-------------- ------------
-------------- ------------
<CAPTION>
Class C Shares Amount
- -------------------------------- -------------- ------------
<S> <C> <C>
Six months ended April 30, 1995:
Shares sold..................... 10,535 $ 98,292
Shares issued in reinvestment of
dividends..................... 239 2,237
Shares reacquired............... (2,150) (20,398)
-------------- ------------
Net increase in shares
outstanding................... 8,624 $ 80,131
-------------- ------------
-------------- ------------
August 1, 1994* through
October 31, 1994:
Shares sold..................... 4,962 $ 46,675
Shares issued in reinvestment of
dividends..................... 30 280
-------------- ------------
Net increase in shares
outstanding................... 4,992 $ 46,955
-------------- ------------
-------------- ------------
</TABLE>
- ---------------
* Commencement of offering of Class C shares.
C-11
<PAGE>
PRUDENTIAL U.S. GOVERNMENT FUND
Financial Highlights
(Unaudited)
<TABLE>
<CAPTION>
Class A
---------------------------------------------------------------------
Six January 22,
Months 1990(D)
Ended Year Ended October 31, Through
April 30, --------------------------------------- October 31,
1995 1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C> <C>
--------- ------ ------ ------ ------ -----------
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
period....................... $ 9.16 $10.59 $ 9.69 $ 9.49 $ 8.97 $ 9.31
--------- ------ ------ ------ ------ -----------
Income from investment
operations
Net investment income.......... .29 .61 .64 .68 .66 .55
Net realized and unrealized
gain (loss) on investment
transactions................. .44 (1.43) .90 .20 .52 (.34)
--------- ------ ------ ------ ------ -----------
Total from investment
operations................. .73 (.82) 1.54 .88 1.18 .21
Less distributions
Dividends from net investment
income....................... (.29) (.61) (.64) (.68) (.66) (.55)
--------- ------ ------ ------ ------ -----------
Net asset value, end of
period....................... $ 9.60 $ 9.16 $10.59 $ 9.69 $ 9.49 $ 8.97
--------- ------ ------ ------ ------ -----------
--------- ------ ------ ------ ------ -----------
TOTAL RETURN#.................. 8.14% (7.80)% 16.43% 9.39% 13.72% 2.16%
RATIOS / SUPPLEMENTAL DATA:
Net assets, end of period
(000)........................ $ 44,427 $6,776 $6,849 $5,024 $2,574 $ 1,617
Average net assets (000)....... $ 24,234 $7,093 $6,339 $3,769 $2,158 $ 918
Ratios to average net assets:
Expenses, including
distribution fees.......... 1.13%* 1.09% .96% .94% 1.24% 1.08%*
Expenses, excluding
distribution fees.......... .98%* .94% .81% .79% 1.09% .94%*
Net investment income........ 6.64%* 6.35% 6.35% 6.92% 7.24% 7.16%*
Portfolio turnover............. 172% 39% 66% 66% 236% 608%
</TABLE>
- ---------------
* Annualized.
(D) Commencement of offering of Class A shares.
# 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.
See Notes to Financial Statements.
C-12
<PAGE>
PRUDENTIAL U.S. GOVERNMENT FUND
Financial Highlights
(Unaudited)
<TABLE>
<CAPTION>
Class C
--------
Class B Six
----------------------------------------------------------------------------- Months
Six Months Ended
Ended Year Ended October 31, April
April 30, ------------------------------------------------------------ 30,
1995 1994 1993 1992 1991 1990 1995
<S> <C> <C> <C> <C> <C> <C> <C>
------------ -------- -------- -------- -------- -------- --------
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of period.... $ 9.16 $ 10.60 $ 9.70 $ 9.50 $ 8.97 $ 9.54 $ 9.16
------------ -------- -------- -------- -------- -------- --------
Income from investment
operations
Net investment income.... .26 .53 .55 .59 .59 .62 .27
Net realized and
unrealized gain (loss)
on investment
transactions........... .44 (1.44) .90 .20 .53 (.57) .44
------------ -------- -------- -------- -------- -------- --------
Total from investment
operations........... .70 (.91) 1.45 .79 1.12 .05 .71
Less distributions
Dividends from net
investment income...... (.26) (.53) (.55) (.59) (.59) (.62) (.27)
------------ -------- -------- -------- -------- -------- --------
Net asset value, end of
period................. $ 9.60 $ 9.16 $ 10.60 $ 9.70 $ 9.50 $ 8.97 $ 9.60
------------ -------- -------- -------- -------- -------- --------
------------ -------- -------- -------- -------- -------- --------
TOTAL RETURN#............ 7.78% (8.57)% 15.44% 8.46% 12.86% .64% 7.82%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000).................. $ 80,380 $124,094 $166,907 $155,143 $158,790 $172,521 $ 131
Average net assets
(000).................. $ 103,161 $146,123 $162,107 $154,502 $168,421 $174,276 $ 92
Ratios to average net
assets:
Expenses, including
distribution fees.... 1.83%* 1.75% 1.81% 1.79% 2.09% 1.99% 1.73%*
Expenses, excluding
distribution fees.... .98%* .94% .81% .79% 1.09% .99% .98%*
Net investment
income............... 5.94%* 5.65% 5.50% 6.07% 6.39% 6.89% 6.04%*
Portfolio turnover....... 172% 39% 66% 66% 236% 608% 172%
<CAPTION>
August 1,
1994(D)
Through
October 31,
1994
<S> <C>
-----------
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of period.... $ 9.58
-----------
Income from investment
operations
Net investment income.... .15
Net realized and
unrealized gain (loss)
on investment
transactions........... (.42)
-----------
Total from investment
operations........... (.27)
Less distributions
Dividends from net
investment income...... (.15)
-----------
Net asset value, end of
period................. $ 9.16
-----------
-----------
TOTAL RETURN#............ (3.03)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000).................. $ 46
Average net assets
(000).................. $ 23
Ratios to average net
assets:
Expenses, including
distribution fees.... 1.82%*
Expenses, excluding
distribution fees.... 1.07%*
Net investment
income............... 6.25%*
Portfolio turnover....... 39%
</TABLE>
- ---------------
* Annualized.
(D) Commencement of offering of Class C shares.
# 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.
See Notes to Financial Statements.
C-13
<PAGE>
A FULL RANGE OF SHAREHOLDER BENEFITS
-------------------------------------------------------
Prudential Mutual Funds provides many useful services and benefits to help
you effectively manage your account:
AUTOMATIC DIVIDEND REINVESTMENT. Reinvest your dividends and/or capital
gains automatically WITHOUT a sales charge.
NO MINIMUM INVESTMENT FOR RETIREMENT ACCOUNTS
- Individual Retirement Accounts (IRAs). Save up to $2,000, or $2,250
if married, per year.
- Rollover IRAs. Retain special tax-deferred advantages for certain
distributions from your company-sponsored retirement plan.
NO FEE CUSTODIAL ACCOUNTS. Give money to a child and obtain tax benefits.
Invest for a child's education or other future needs.
SYSTEMATIC WITHDRAWAL PLAN. Receive monthly or quarterly checks in any
amount with the proceeds withdrawn from your fund account.
SHAREHOLDER REPORTS AND REGULAR INVESTMENT UPDATES. In addition to
comprehensive account activity statements, you will also receive annual and
semi-annual fund reports as well as any important updates, including tax
information, that may affect your fund.
24 Hour Toll Free
Telephone Number
For customer service, call
1-800-222-1852 8 a.m. to 6 p.m. ET
For prompt 24 hour service regarding
your account balance, fund yields and
prices, call 1-800-222-7637
<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 Advisor or Pruco Securities
Representative or telephone the Funds at (800) 225-1852 for a free
prospectus. Read the prospectus carefully before you invest or send money.
TAXABLE BOND FUNDS
Prudential Adjustable Rate Securities Fund, Inc.
Prudential Diversified Bond Fund, Inc.
Prudential GNMA Fund, Inc.
Prudential Government Income Fund, Inc.
(formerly known as Prudential
Government Plus Fund)
Prudential Government Securities Trust
Intermediate Term Series
Prudential High Yield Fund, Inc.
Prudential Structured Maturity Fund, Inc.
Income Portfolio
Prudential U.S. Government Fund
The BlackRock Government Income Trust
TAX-EXEMPT BOND FUNDS
Prudential California Municipal Fund
California Series
California Income Series
Prudential Municipal Bond Fund
High Yield Series
Insured Series
Modified Term Series
Prudential Municipal Series Fund
Arizona Series
Florida Series
Georgia Series
Hawaii Income Series
Maryland Series
Massachusetts Series
Michigan Series
Minnesota Series
New Jersey Series
New York Series
North Carolina Series
Ohio Series
Pennsylvania Series
Prudential National Municipal Fund, Inc.
GLOBAL FUNDS
Prudential Europe Growth Fund, Inc.
Prudential Global Fund, Inc.
Prudential Global Genesis Fund, Inc.
Prudential Global Natural Resources Fund, Inc.
Prudential Intermediate Global Income Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Prudential Short-Term Global Income Fund, Inc.
Global Assets Portfolio
Short-Term Global Income Portfolio
Global Utility Fund, Inc.
EQUITY FUNDS
Prudential Allocation Fund
(formerly known as Prudential FlexiFund)
Conservatively Managed Portfolio
Strategy Portfolio
Prudential Equity Fund, Inc.
Prudential Equity Income Fund
Prudential Growth Opportunity Fund, Inc.
Prudential IncomeVertible-Registered Trademark- Fund, Inc.
Prudential Multi-Sector Fund, Inc.
Prudential Strategist Fund, Inc.
(formerly known as Prudential Growth Fund)
Prudential Utility Fund, Inc.
Nicholas-Applegate Fund, Inc.
Nicholas-Applegate Growth Equity Fund
MONEY MARKET FUNDS
*Taxable Money Market Funds
Prudential Government Securities Trust
Money Market Series
U.S. Treasury Money Market Series
Prudential Special Money Market Fund
Money Market Series
Prudential MoneyMart Assets
*Tax-Free Money Market Funds
Prudential Tax-Free Money Fund
Prudential California Municipal Fund
California Money Market Series
Prudential Municipal Series Fund
Connecticut Money Market Series
Massachusetts Money Market Series
New Jersey Money Market Series
New York Money Market Series
*Command Funds
Command Money Fund
Command Government Fund
Command Tax-Free Fund
*Institutional Money Market Funds
Prudential Institutional Liquidity Portfolio, Inc.
Institutional Money Market Series
<PAGE>
SEMI ANNUAL REPORT April 30, 1995
Prudential
U.S. Government
Fund
- --------------------------
(ICON)
(LOGO)
Trustees
Stephen C. Eyre
Delayne Dedrick Gold
Don G. Hoff
Harry A. Jacobs, Jr.
Sidney R. Knafel
Robert E. La Blanc
Lawrence C. McQuade
Thomas A. Owens, Jr.
Richard A. Redeker
Clay T. Whitehead
Officers
Lawrence C. McQuade, President
Robert F. Gunia, Vice President
Susan C. Cote, Treasurer
S. Jane Rose, Secretary
Manager
Prudential Mutual Fund Management, Inc.
One Seaport Plaza
New York, NY 10292
Investment Adviser
The Prudential Investment Corporation
Prudential Plaza
Newark, NJ 07101
Distributors
Prudential Mutual Fund Distributors, Inc.
Prudential Securities Incorporated
One Seaport Plaza
New York, NY 10292
Custodian
State Street Bank and Trust Company
One Heritage Drive
North Quincy, MA 02171
Transfer Agent
Prudential Mutual Fund Services, Inc.
P.O. Box 15005
New Brunswick, NJ 08906
Independent Accountants
Deloitte & Touche LLP
Two World Financial Center
New York, NY 10281
Legal Counsel
Shereff, Friedman, Hoffman & Goodman
919 Third Avenue
New York, NY 10022
Prudential Mutual Funds
One Seaport Plaza
New York, NY 10292
Toll Free (800) 225-1852, Collect (908) 417-7555
This report is not authorized for distribution to prospective investors
unless preceded or accompanied by a current prospectus.
73914202
73914103 MF130E
73914301 (LOGO)
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
SYNOPSIS................................................................................................... 2
General................................................................................................ 2
The Proposed Reorganization and Liquidation............................................................ 2
Reasons for the Proposed Reorganization and Liquidation................................................ 3
Certain Differences Between Government Income Fund and U.S. Government Fund............................ 5
Structure of U.S. Government Fund and Government Income Fund........................................... 6
Investment Objective and Policies -- Government Income Fund............................................ 7
Fees and Expenses...................................................................................... 7
Management Fees.................................................................................... 7
Distribution Fees.................................................................................. 8
Other Expenses..................................................................................... 9
Fee Waivers and Subsidy............................................................................ 9
Expense Ratios..................................................................................... 9
Purchases and Redemptions.............................................................................. 10
Exchange Privileges.................................................................................... 11
Dividends and Distributions............................................................................ 11
Federal Tax Consequences of Proposed Reorganization.................................................... 11
PRINCIPAL RISK FACTORS..................................................................................... 11
THE PROPOSED TRANSACTION................................................................................... 12
Agreement and Plan of Reorganization and Liquidation................................................... 12
Reasons for the Reorganization and Liquidation......................................................... 13
Description of Securities to be Issued................................................................. 14
Tax Considerations..................................................................................... 14
Certain Comparative Information About the Funds........................................................ 15
Organization....................................................................................... 15
Capitalization..................................................................................... 15
Shareholder Meetings and Voting Rights............................................................. 15
Shareholder Liability.............................................................................. 15
Liability and Indemnification of Directors/Trustees................................................ 15
Pro Forma Capitalization and Ratios.................................................................... 16
INFORMATION ABOUT GOVERNMENT INCOME FUND................................................................... 16
INFORMATION ABOUT U.S. GOVERNMENT FUND..................................................................... 18
VOTING INFORMATION......................................................................................... 19
OTHER MATTERS.............................................................................................. 20
SHAREHOLDERS' PROPOSALS.................................................................................... 20
APPENDIX A -- Form of Agreement and Plan of Reorganization and Liquidation................................. A-1
APPENDIX B -- Semi-Annual Report to Shareholders -- Government Income Fund................................. B-1
APPENDIX C -- Semi-Annual Report to Shareholders -- U.S. Government Fund................................... C-1
TABLE OF CONTENTS
ENCLOSURES
Prospectus of Government Income Fund dated May 1, 1995, including May 17, 1995 and July 3, 1995
Supplements thereto.
Prospectus of U.S. Government Fund dated January 3, 1995, including May 5, 1995, May 12, 1995, July 3,
1995 and October 2, 1995 Supplements thereto.
Annual Report to Shareholders of Government Income Fund for the fiscal year ended February 28, 1995.
Annual Report to Shareholders of U.S. Government Fund for the fiscal year ended October 31, 1994.
</TABLE>
<PAGE>
PRUDENTIAL GOVERNMENT INCOME FUND, INC.
STATEMENT OF ADDITIONAL INFORMATION
DATED NOVEMBER , 1995
ACQUISITION OF ASSETS OF
PRUDENTIAL U.S. GOVERNMENT FUND
ONE SEAPORT PLAZA
NEW YORK, NEW YORK, 10292
(800) 225-1852
------------------------
BY AND IN EXCHANGE FOR THE SHARES OF
PRUDENTIAL GOVERNMENT INCOME FUND
ONE SEAPORT PLAZA
NEW YORK, NEW YORK 10292
(800) 225-1852
This Statement of Additional Information, relating specifically to the
proposed transfer of all the assets and the assumption of all the liabilities,
if any, of Prudential U.S. Government Fund (the Acquired Fund) by Prudential
Government Income Fund, Inc. (the Acquiring Fund) consists of this cover page
and the Statement of Additional Information of the Acquiring Fund dated May 1,
1995, as Supplemented, which is attached hereto and incorporated herein by
reference.
The Statement of Additional Information is not a prospectus. A Prospectus
and Proxy Statement dated November , 1995 relating to the above referenced
matter may be obtained from the Acquiring Fund without charge by writing or
calling Prudential Government Income Fund, Inc., at the address or telephone
number listed above. This Statement of Additional Information relates to, and
should be read in conjunction with, the Prospectus and Proxy Statement.
<PAGE>
PRUDENTIAL GOVERNMENT INCOME FUND, INC.
STATEMENT OF ADDITIONAL INFORMATION
DATED MAY 1, 1995
Prudential Government Income Fund, Inc. (the Fund), is an open-end,
diversified management investment company, or mutual fund, which has as its
investment objective the seeking of a high current return. The Fund will seek to
achieve this objective primarily by investing in U.S. Government securities,
including U.S. Treasury Bills, Notes and Bonds and other debt securities issued
by the U.S. Treasury, and obligations issued or guaranteed by U.S. Government
agencies or instrumentalities; writing covered put and call options and
purchasing put and call options. In an effort to hedge against changes in
interest rates and thus preserve its capital, the Fund may also engage in
transactions involving futures contracts on U.S. Government securities and
options on such contracts. There can be no assurance that the Fund's investment
objective will be achieved.
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 May 1, 1995, a copy of
which may be obtained from the Fund at One Seaport Plaza, New York, New York
10292.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
CROSS-REFERENCE
TO PAGE IN
PAGE PROSPECTUS
---- ---------------
<S> <C> <C>
General Information................................... B-2 --
Investment Objective and Policies..................... B-2 8
Investment Restrictions............................... B-9 16
Directors and Officers................................ B-11 17
Manager............................................... B-14 17
Distributor........................................... B-16 17
Portfolio Transactions and Brokerage.................. B-18 20
Purchase and Redemption of Fund Shares................ B-20 24
Shareholder Investment Account........................ B-23 32
Net Asset Value....................................... B-26 20
Taxes, Dividends and Distributions.................... B-27 21
Performance Information............................... B-29 21
Custodian, Transfer and Dividend Disbursing Agent and
Independent Accountants.............................. B-31 20
Financial Statements.................................. B-32 --
Independent Auditors' Report.......................... B-41 --
</TABLE>
- --------------------------------------------------------------------------------
MF-128B 444079V
<PAGE>
GENERAL INFORMATION
At a special meeting held on July 19, 1994, shareholders approved an
amendment to the Fund's Articles of Incorporation to change the Fund's name from
Prudential-Bache Government Plus Fund, Inc. to Prudential Government Income
Fund, Inc.
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to seek a high current return. The Fund
will seek a high current return primarily from interest income from U.S.
Government securities, premiums from put and call options on U.S. Government
securities and net gains from closing purchase and sale transactions with
respect to options on U.S. Government securities. The Fund may also realize net
gains from sales of portfolio securities. There can be no assurance that the
Fund's investment objective will be achieved. See "How the Fund
Invests--Investment Objective and Policies" in the Prospectus.
U.S. GOVERNMENT SECURITIES
MORTGAGE-RELATED SECURITIES ISSUED BY U.S. GOVERNMENT
INSTRUMENTALITIES. Mortgages backing the securities purchased by the Fund
include conventional thirty-year fixed rate mortgages, graduated payment
mortgages, fifteen-year mortgages and adjustable rate mortgages. All of these
mortgages can be used to create pass-through securities. A pass-through security
is formed when mortgages are pooled together and undivided interests in the pool
or pools are sold. The cash flow from the mortgages is passed through to the
holders of the securities in the form of periodic payments of interest,
principal and prepayments (net of a service fee). Prepayments occur when the
holder of an individual mortgage prepays the remaining principal before the
mortgage's scheduled maturity date. As a result of the pass-through of
prepayments of principal on the underlying securities, mortgage-backed
securities are often subject to more rapid prepayment of principal than their
stated maturity would indicate. Because the prepayment characteristics of the
underlying mortgages vary, it is not possible to predict accurately the realized
yield or average life of a particular issue of pass-through certificates.
Prepayment rates are important because of their effect on the yield and price of
the securities. Accelerated prepayments adversely impact yields for
pass-throughs purchased at a premium. The opposite is true for pass-throughs
purchased at a discount.
GNMA CERTIFICATES. Certificates of the Government National Mortgage
Association (GNMA Certificates) are mortgage-backed securities, which evidence
an undivided interest in a pool of mortgage loans. GNMA Certificates differ from
bonds in that principal is paid back 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 a share of all interest and
principal payments paid and owed 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. Legislative changes may be proposed from time
to time in relation to the Department of Housing and Urban Development which, if
adopted, could alter the viability of investing in GNMAs. As of the date of this
Statement of Additional Information, no such legislation has been effected. The
Fund's adviser would re-evaluate the Fund's investment objectives and policies
if any such legislative proposals were adopted.
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.
B-2
<PAGE>
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.
FHLMC SECURITIES. The Federal Home Loan Mortgage Corporation was created in
1970 through enactment of Title III of the Emergency Home Finance Act of 1970.
Its purpose is to promote development of a nationwide secondary market in
conventional residential mortgages.
The FHLMC issues two types of mortgage pass-through securities, mortgage
participation certificates (PCs) and guaranteed mortgage certificates (GMCs).
PCs resemble GNMA Certificates in that each PC represents a PRO RATA share of
all interest and principal payments made and owed on the underlying pool. The
FHLMC guarantees timely monthly payment of interest on PCs and the ultimate
payment of principal.
GMCs also represent a PRO RATA interest in a pool of mortgages. However,
these instruments pay interest semi-annually and return principal once a year in
guaranteed minimum payments. The expected average life of these securities is
approximately ten years.
FNMA SECURITIES. The Federal National Mortgage Association was established
in 1938 to create a secondary market in mortgages insured by the FHA. FNMA
issues guaranteed mortgage pass-through certificates (FNMA Certificates). FNMA
Certificates resemble GNMA Certificates in that each FNMA Certificate represents
a PRO RATA share of all interest and principal payments made and owed on the
underlying pool. FNMA guarantees timely payment of interest on FNMA Certificates
and the full return of principal. Like GNMA Certificates, FNMA Certificates are
assumed to be prepaid fully in their twelfth year.
CHARACTERISTICS OF MORTGAGE-BACKED SECURITIES. The market value of mortgage
securities, like other U.S. Government securities, will generally vary inversely
with changes in market interest rates, declining when interest rates rise and
rising when interest rates decline. However, mortgage securities, while having
comparable risk of decline during periods of rising rates, usually have less
potential for capital appreciation than other investments of comparable
maturities due to the likelihood of increased prepayments of mortgages as
interest rates decline. In addition, to the extent such mortgage securities are
purchased at a premium, mortgage foreclosures and unscheduled principal
prepayments generally will result in some loss of the holders' principal to the
extent of the premium paid. On the other hand, if such mortgage securities are
purchased at a discount, an unscheduled prepayment of principal will increase
current and total returns and accelerate the recognition of income which when
distributed to shareholders will be taxable as ordinary income.
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 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 (the Investment Company Act) 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 Investment Company
Act and (d) are not registered or regulated under the Investment Company Act 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.
B-3
<PAGE>
OTHER SECURITIES
The Fund will invest in foreign banks and foreign branches of U.S. banks
only if after giving effect to such investments all such investments would
constitute less than 10% of the Fund's total assets (determined at the time of
investment). Investing in securities of foreign companies in foreign countries
involves certain considerations and risks which are not typically associated
with investing in U.S. Government securities and those of domestic companies.
Foreign companies are not generally subject to uniform accounting, auditing and
financial standards and requirements comparable to those applicable to U.S.
companies. There may be less publicly available information about foreign
companies and governments compared to reports and ratings published about U.S.
companies. Securities of some foreign companies are less liquid and more
volatile than securities of comparable U.S. companies, and brokerage commissions
and other transaction costs on foreign securities exchanges are generally higher
than in the United States.
OPTION WRITING AND RELATED RISKS
The Fund will write (I.E., sell) covered call or put options which are
traded on registered securities exchanges (the Exchanges) and may also write
such options with primary U.S. Government securities dealers recognized by the
Federal Reserve Bank of New York (OTC options). A call option 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.
OPTIONS TRANSACTIONS
Exchange-traded options are issued by The Options Clearing Corporation (OCC)
which, in effect, gives its guarantee to every exchange-traded option
transaction. In contrast, OTC options represent a contract between a U.S.
Government securities dealer and the Fund with no guarantee of the OCC. Thus,
when the Fund purchases an OTC option, it relies on the dealer from which it has
purchased the OTC option to make or take delivery of the U.S. Government
securities underlying the OTC option. Failure by the dealer to do so would
result in the loss of premium paid by the Fund as well as loss of the expected
benefit of the transaction.
Exchange-traded options generally have a continuous liquid market while OTC
options do not. Consequently, the Fund will generally be able to realize the
value of an OTC option it has purchased only by exercising it or reselling it to
the issuing dealer. Similarly, when the Fund writes an OTC option, it generally
will be able to close out the OTC option prior to its expiration only by
entering into a closing purchase transaction with the dealer to which the Fund
originally wrote the OTC option. While the Fund will enter into OTC option
transactions only with dealers who will agree to and which are expected to be
capable of entering into closing transactions with the Fund, there can be no
assurance that the Fund will be able to liquidate an OTC option at a favorable
price at any time prior to expiration. Until the Fund, as a covered OTC call
option writer, is able to effect a closing purchase transaction, it will not be
able to liquidate securities used as cover until the option expires, is
exercised or the Fund provides substitute cover. See "How the Fund
Invests--Investment Objective and Policies--Other Investment
Information--Illiquid Securities" in the Prospectus. In the event of insolvency
of the counterparty, the Fund may be unable to liquidate an OTC option. With
respect to options written by the Fund, the inability to enter into a closing
transaction may result in material losses to the Fund. This requirement may
impair the Fund's ability to sell a portfolio security at a time when such a
sale might be advantageous.
The principal reason for writing options on a securities portfolio is to
attempt to realize, through the receipt of premiums, a greater return than would
be realized on the underlying securities alone. 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
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
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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 market value of the underlying security at that time.
So long as the obligation of the writer continues, the writer may be
assigned an exercise notice by the broker-dealer through whom the option was
sold. The exercise notice would require the writer 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 writer effects a closing purchase
transaction by purchasing an option covering the same underlying security and
having the same exercise price and expiration date (of the same series) as the
one previously sold. Once an option has been exercised, the writer may not
execute a closing purchase transaction. To secure the obligation to deliver the
underlying security in the case of a call option, the writer of the option is
required to pledge for the benefit of the broker the underlying security or
other assets in accordance with the rules of The Options Clearing Corporation
(OCC), an institution created to interpose itself between buyers and sellers of
options. Technically, the OCC assumes the other side of every purchase and sale
transaction on an Exchange and, by doing so, guarantees the transaction.
The Fund writes only "covered" options. This means that, so long as the Fund
is obligated as the writer of a call option, it will (a) own the underlying
securities subject to the option, except that, in the case of call options on
U.S. Treasury Bills, the Fund might own U.S. Treasury Bills of a different
series from those underlying the call option, but with a principal amount and
value corresponding to the option contract amount and a maturity date no later
than that of the securities deliverable under the call option or (b) deposit and
maintain with its Custodian in a segregated account cash, U.S. Government
securities or other liquid, high-grade debt obligations having a value at least
equal to the fluctuating market value of the securities underlying the call. The
Fund will be considered "covered" with respect to a put option it writes if, so
long as it is obligated as the writer of a put option, it will (a) deposit and
maintain with its Custodian in a segregated account cash, U.S. Government
securities or other liquid high-grade debt obligations having a value equal to
or greater than the exercise price of the option, or (b) own a put option on the
same security with an exercise price the same or higher than the exercise price
of the put option sold or, if lower, deposit and maintain the differential in
cash, U.S. Government securities or other liquid high-grade debt obligations in
a segregated account with its Custodian.
To the extent that a secondary market is available on the Exchanges, the
covered option writer may close out options it has written prior to the
assignment of an exercise notice by purchasing, in a closing purchase
transaction, an option of the same series as the option previously written. If
the cost of such a closing purchase, plus transaction costs, is greater than the
premium received upon writing the original option, the writer will incur a loss
in the transaction.
Because the Fund can 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 or other cover against which it can write options.
If the Fund writes a substantial number of options, its portfolio turnover will
be higher than if it did not do so. Portfolio turnover will increase to the
extent that options written by the Fund are exercised. Because the exercise of
such options depends on changes in the price of the underlying securities, the
Fund's portfolio turnover rate cannot be accurately predicted. The Fund's
turnover rate for the fiscal years ended February 28, 1994 and February 28, 1995
was 80% and 206%, respectively. The recent increase in the Fund's portfolio
turnover rate was generally due to the movement in interest rates, which
required a restructuring of the Fund's mortgage holdings and Treasury holdings.
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 availability of deliverable Treasury Bills
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
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corresponding to the option contract size, the Fund may be hedged from a risk
standpoint. In addition, 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 GNMA CERTIFICATES. Options on GNMA Certificates are not currently traded
on any Exchange. However, the Fund intends to purchase and write such options
should they commence trading on any Exchange.
Since the remaining principal balance of GNMA Certificates declines each
month as a result of mortgage payments, the Fund, as a writer of a covered GNMA
call holding GNMA Certificates as "cover" to satisfy its delivery obligation in
the event of assignment of an exercise notice, may find that its GNMA
Certificates no longer have a sufficient remaining principal balance for this
purpose. Should this occur, the Fund will enter into a closing purchase
transaction or will purchase additional GNMA Certificates from the same pool (if
obtainable) or replacement GNMA Certificates in the cash market in order to
remain covered.
A GNMA Certificate held by the Fund to cover an option position in any but
the nearest expiration month may cease to represent cover for the option in the
event of a decline in the GNMA coupon rate at which new pools are originated
under the FHA/VA loan ceiling in effect at any given time. Should this occur,
the Fund will no longer be covered, and the Fund will either enter into a
closing purchase transaction or replace the GNMA Certificate with a GNMA
Certificate which represents cover. When the Fund closes its position or
replaces the GNMA Certificate, it may realize an unanticipated loss and incur
transaction costs.
RISKS PERTAINING TO THE SECONDARY MARKET. An option position may be closed
out only on an Exchange which provides a secondary market for an option of the
same series. Although the Fund will generally purchase or write only those
options for which there appears to be an active secondary market, there is no
assurance that a liquid secondary market on an Exchange will exist for any
particular option at any particular time, and for some options no secondary
market on an Exchange may exist. In such event, it might not be possible to
effect closing transactions in particular options, with the result that the Fund
would have to exercise its options in order to realize any profit and may incur
transaction costs in connection therewith. If the Fund as a covered call option
writer is unable to effect a closing purchase transaction in a secondary market,
it will not be able to sell the underlying security until the option expires or
it delivers the underlying security upon exercise.
Reasons for the absence of a liquid secondary market on an exchange include
the following: (a) insufficient trading interest in certain options; (b)
restrictions on transactions imposed by an Exchange; (c) trading halts,
suspensions or other restrictions imposed with respect to particular classes or
series of options or underlying securities; (d) interruption of the normal
operations on an Exchange; (e) inadequacy of the facilities of an Exchange or
the OCC to handle current trading volume; or (f) a decision by one or more
Exchanges to discontinue the trading of options (or a particular class or series
of options), in which event the secondary market on that Exchange (or in that
class or series of options) would cease to exist, although outstanding options
on that Exchange that had been issued by the OCC as a result of trades on that
Exchange would generally continue to be exercisable in accordance with their
terms.
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.
FUTURES CONTRACTS ON U.S. GOVERNMENT SECURITIES
CHARACTERISTICS AND PURPOSE OF INTEREST RATE FUTURES. The Fund may purchase
and sell U.S. Exchange-traded interest-rate futures. Currently, there are
futures contracts based on U.S. Treasury Bonds, U.S. Treasury Notes, three-month
U.S. Treasury Bills and GNMA certificates. A clearing corporation associated
with the commodities exchange on which a futures contract trades assumes
responsibility for the completion of transactions and guarantees that futures
contracts will be performed. Although futures contracts call for actual delivery
or acceptance of debt securities, in most cases the contracts are closed out
before the settlement date without the making or taking of delivery.
CHARACTERISTICS. The Fund neither pays nor receives money upon the purchase
or sale of a futures contract. Instead, when the Fund enters into a futures
contract, it will initially be required to deposit with its Custodian for the
benefit of the broker (the futures commission merchant) an amount of "initial
margin" of cash or U.S. Treasury Bills, currently equal to
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approximately 1 1/2 to 2% of the contract amount for futures on Treasury Bonds
and Notes and approximately 1/10 of 1% of the contract amount for futures on
Treasury Bills. Initial margin in futures transactions is different from margin
in securities transactions in that futures contract initial margin does not
involve the borrowing of funds by the customer to finance the transactions.
Rather, initial margin is in the nature of a good faith deposit on the contract
which is returned to the Fund upon termination of the futures contract, assuming
all contractual obligations have been satisfied. Subsequent payments, called
variation margin, to and from the futures commission merchant are made on a
daily basis as the market price of the futures contract fluctuates. This process
is known as "marking to market." At any time prior to expiration of the futures
contract, the Fund may elect to close the position by taking an offsetting
position which will operate to terminate the Fund's position in the futures
contract. While interest rate futures contracts provide for the delivery and
acceptance of securities, most futures contracts are terminated by entering into
offsetting transactions.
Successful use of futures contracts by the Fund is also subject to the
ability of the Fund's investment adviser to predict correctly movements in the
direction of 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 which would adversely affect the price of securities in its
portfolio and the price of such securities increases instead, the Fund will lose
part or all of the benefit of the increased value of its securities because it
will have offsetting losses in its futures positions. In addition, in such
situations, if the Fund has insufficient cash to meet daily variation margin
requirements, it may have to sell securities to meet such requirements. Such
sales of securities may be, but will not necessarily be, at increased prices
which reflect the rising market. The Fund may have to sell securities at a time
when it is disadvantageous to do so.
The hours of trading futures contracts on U.S. Government securities may not
conform to the hours during which the Fund may trade such securities. To the
extent that the futures markets close before or after the U.S. Government
securities markets, significant variations can occur in one market that cannot
be reflected in the other market.
OPTIONS ON FUTURES CONTRACTS
CHARACTERISTICS. An option on a futures contract gives the purchaser the
right, but not the obligation, to assume a position in a futures contract (a
long position if the option is a call and a short position if the option is a
put) at a specified exercise price at any time during the option exercise
period. The writer of the option is required upon exercise to assume an
offsetting futures position (a short position if the option is a call and a long
position if the option is a put). Upon exercise of the option, the assumption of
offsetting futures positions by the writer and holder of the option will be
accompanied by delivery of the accumulated cash balance in the writer's futures
margin account which represents the amount by which the market price of the
futures contract, at exercise, exceeds, in the case of a call, or is less than,
in the case of a put, the exercise price of the option on the futures contract.
Currently, options can be purchased or written with respect to futures contracts
on GNMAs, U.S. Treasury Bonds and U.S. Treasury Notes on The Chicago Board of
Trade and U.S. Treasury Bills on the International Monetary Market at the
Chicago Mercantile Exchange.
The holder or writer of an option may terminate its position by selling or
purchasing an option of the same series. There is no guarantee that such closing
transactions can be effected.
The Fund will be considered "covered" with respect to a call option it
writes on a futures contract if it (a) owns a long position in the underlying
futures contract or the security underlying the futures contract, (b) owns a
security which is deliverable under the futures contract or (c) owns a separate
call option to purchase the same futures contract at a price no higher than the
exercise price of the call option written by the Fund or, if higher, the Fund
deposits and maintains the differential in cash, U.S. Government securities or
other liquid high-grade debt obligations in a segregated account with its
Custodian. The Fund is considered "covered" with respect to a put option it
writes on a futures contract if it (a) segregates and maintains with its
Custodian cash, U.S. Government securities or liquid high-grade debt obligations
at all times equal in value to the exercise price of the put (less any related
margin deposited), or (b) owns a put option on the same futures contract with an
exercise price as high or higher than the price of the contract held by the Fund
or, if lower, the Fund deposits and maintains the differential in cash, U.S.
Government securities or other liquid, high-grade debt obligations in a
segregated account with its Custodian. There is no limitation on the amount of
the Fund's assets which can be placed in the segregated account.
The Fund will be required to deposit initial and maintenance margin with
respect to put and call options on futures contracts written by it pursuant to
the Fund's futures commissions merchants' requirements similar to those
applicable to futures contracts, described above.
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The skills needed to trade futures contracts and options thereon are
different than those needed to select U.S. Government securities. The Fund's
investment adviser has experience in managing other securities portfolios which
uses similar options and futures strategies as the Fund.
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 such of other 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.
INTEREST RATE TRANSACTIONS
The Fund may enter into interest rate swaps, on either an asset-based or
liability-based basis, depending on whether it is hedging its assets or its
liabilities. Under normal circumstances, the Fund will enter into interest rate
swaps on a net basis, I.E., the two payment streams 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, U.S. Government securities or liquid
high-grade debt obligations 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. 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. The Fund will enter into interest
rate swaps only with parties meeting creditworthiness standards approved by the
Fund's Board of Directors. The investment adviser will monitor the
creditworthiness of such parties under the supervision of the Board of
Directors.
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 the investment adviser is
incorrect in its forecast of market values, interest rates and other applicable
factors, the investment performance of the Fund would diminish compared to what
it would have been if this investment technique was never used.
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 rate 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.
ILLIQUID SECURITIES
The Fund may invest up to 15% of its net assets in repurchase agreements
which have a maturity of longer than seven days or in other illiquid securities,
including securities that are illiquid by virtue of the absence of a readily
available market or legal or contractual restrictions on resale. Historically,
illiquid securities have included securities subject to
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contractual or legal restrictions on resale because they have not been
registered under the Securities Act of 1933, as amended (Securities Act),
securities which are otherwise not readily marketable and repurchase agreements
having a maturity of longer than seven days. Securities which have not been
registered under the Securities Act are referred to as private placements or
restricted securities and are purchased directly from the issuer or in the
secondary market. Mutual funds do not typically hold a significant amount of
these restricted or other illiquid securities because of the potential for
delays on resale and uncertainty in valuation. Limitations on resale may have an
adverse effect on the marketability of portfolio securities and a mutual fund
might be unable to dispose of restricted or other illiquid securities promptly
or at reasonable prices and might thereby experience difficulty satisfying
redemptions within seven days. A mutual fund might also have to register such
restricted securities in order to dispose of them resulting in additional
expense and delay. Adverse market conditions could impede such a public offering
of securities.
In recent years, however, a large institutional market has developed for
certain securities that are not registered under the Securities Act including
repurchase agreements, commercial paper, foreign securities, municipal
securities 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 of the Securities Act allows for a broader institutional trading
market for securities otherwise subject to restriction on resale to the general
public. Rule 144A establishes a "safe harbor" from the registration requirements
of the Securities Act for resales of certain securities to qualified
institutional buyers. The investment adviser anticipates that the market for
certain restricted securities such as institutional commercial paper,
convertible securities and foreign securities will expand further as a result of
this regulation and the development of automated systems for the trading,
clearance and settlement of unregistered securities of domestic and foreign
issuers, such as the PORTAL System sponsored by the National Association of
Securities Dealers, Inc. (NASD).
Restricted securities eligible for resale pursuant to Rule 144A under the
Securities Act and commercial paper for which there is a readily available
market will not be deemed to be illiquid. The investment adviser will monitor
the liquidity of such restricted securities subject to the supervision of the
Board of Directors. In reaching liquidity decisions, the investment adviser will
consider, INTER ALIA, the following factors: (1) the frequency of trades and
quotes for the security; (2) the number of dealers wishing to purchase or sell
the security and the number of other potential purchasers; (3) dealer
undertakings to make a market in the security and (4) the nature of the security
and the nature of the marketplace trades (E.G., the time needed to dispose of
the security, the method of soliciting offers and the mechanics of the
transfer). In addition, in order for commercial paper that is issued in reliance
on Section 4(2) of the Securities Act to be considered liquid, (i) it must be
rated in one of the two highest rating categories by at least two nationally
recognized statistical rating organizations (NRSRO), or if only one NRSRO rates
the securities, by that NRSRO, or, if unrated, be of comparable quality in the
view of the investment adviser; and (ii) it must not be "traded flat" (I.E.,
without accrued interest) or in default as to principal or interest. Repurchase
agreements subject to demand are deemed to have a maturity equal to the notice
period.
INVESTMENT RESTRICTIONS
The following restrictions are fundamental policies. Fundamental policies
are those which cannot be changed without the approval of the holders of a
majority of the Fund's outstanding voting securities. A "majority of the Fund's
outstanding voting securities," when used in this Statement of Additional
Information, means the lesser of (i) 67% of the voting shares represented at a
meeting at which more than 50% of the outstanding voting shares are present in
person or represented by proxy or (ii) more than 50% of the outstanding voting
shares.
The Fund may not:
1. Purchase securities on margin (but the Fund may obtain such short-term
credits as may be necessary for the clearance of transactions); the deposit or
payment by the Fund of initial or variation margin in connection with interest
rate futures contracts or related options transactions is not considered the
purchase of a security on margin.
2. Make short sales of securities or maintain a short position, except
short sales "against the box."
3. Issue senior securities, borrow money or pledge its assets except that
the Fund may borrow up to 20% of the value of its total assets (calculated when
the loan is made) for temporary, extraordinary or emergency purposes or for the
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clearance of transactions. The Fund may pledge up to 20% of the value of its
total assets to secure such borrowings. For purposes of this restriction, the
purchase or sale of securities on a when-issued or delayed delivery basis,
collateral arrangements with respect to interest rate swap transactions, reverse
repurchase agreements or dollar roll transactions or the writing of options on
debt securities or on interest rate futures contracts or other financial futures
contracts are not deemed to be a pledge of assets and neither such arrangements,
nor the purchase or sale of interest rate futures contracts or other financial
futures contracts or the purchase or sale of related options, nor obligations of
the Fund to Directors pursuant to deferred compensation arrangements are deemed
to be the issuance of a senior security.
4. Purchase any security (other than obligations of the U.S. Government,
its agencies, or instrumentalities) if as a result: (i) with respect to 75% of
the Fund's total assets, more than 5% of the Fund's total assets (determined at
the time of investment) would then be invested in securities of a single issuer,
or (ii) 25% or more of the Fund's total assets (determined at the time of
investment) would be invested in a single industry.
5. Purchase any security if as a result the Fund would then hold more than
10% of the outstanding voting securities of an issuer.
6. Purchase any security if as a result the Fund would then have more than
5% of its total assets (determined at the time of investment) invested in
securities of companies (including predecessors) less than three years old,
except that the Fund may invest in the securities of any U.S. Government agency
or instrumentality, and in any security guaranteed by such an agency or
instrumentality.
7. 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, securities of companies which invest or deal in real
estate, interest rate futures contracts and other financial futures contracts
and options thereon.
8. Act as underwriter except to the extent that, in connection with the
disposition of portfolio securities, it may be deemed to be an underwriter under
certain federal securities laws.
9. Make investments for the purpose of exercising control or management.
10. Invest in securities of other registered investment companies, except by
purchases in the open market involving only customary brokerage commissions and
as a result of which not more than 5% of its total assets (determined at the
time of investment) would be invested in such securities, or except as part of a
merger, consolidation or other acquisition.
11. Invest in interests in oil, gas or other mineral exploration or
development programs.
12. Make loans, except through (i) repurchase agreements and (ii) loans of
portfolio securities (limited to 30% of the Fund's total assets).
13. Purchase warrants if as a result the Fund would then have more than 5%
of its total assets (determined at the time of investment) invested in warrants.
14. Write, purchase or sell puts, calls or combinations thereof, or purchase
or sell futures contracts or related options, except that the Fund may write put
and call options on U.S. Government securities, purchase put and call options on
U.S. Government securities and purchase or sell interest rate futures contracts
and other financial futures contracts and related options.
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:
1. Invest in oil, gas and mineral leases.
2. Purchase or sell real estate or interests in real estate, including real
estate limited partnerships, but excluding securities which are secured by real
estate and the securities of companies which invest in real estate which are
readily marketable.
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3. 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.
4. Purchase securities of any one issuer if, to the knowledge of the Fund,
any officer or director of the Fund or the Manager or Subadviser owns more than
1/2 of 1% of the outstanding securities of such issuer, and such officers and
directors who own more than 1/2 of 1% own in the aggregate more than 5% of the
outstanding securities of such issuer.
5. Invest in securities of companies having a record, together with
predecessors, of less than three years of continuous operation, or securities of
issuers which are restricted as to disposition, if more than 15% of its total
assets would be invested in such securities. This restriction shall not apply to
mortgage-backed securities, asset-backed securities or obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities.
DIRECTORS AND OFFICERS
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS
NAME, ADDRESS AND AGE POSITION WITH FUND DURING PAST FIVE YEARS
- ---------------------------- ----------------------- --------------------------------------------------
<S> <C> <C>
Edward D. Beach (70) Director President and Director of BMC Fund, Inc., a
c/o Prudential Mutual Fund closed-end investment company; prior thereto,
Management, Inc. Vice Chairman of Broyhill Furniture Industries,
One Seaport Plaza Inc.; Certified Public Accountant; Secretary and
New York, NY Treasurer of Broyhill Family Foundation, Inc.;
Member of the Board of Trustees of Mars Hill
College; President and Director of First
Financial Fund, Inc. and The High Yield Income
Fund, Inc.; Director of The Global Government
Plus Fund, Inc. and The Global Total Return Fund,
Inc.,
Delayne Dedrick Gold (55) Director Marketing and Management Consultant.
c/o Prudential Mutual Fund
Management, Inc.
One Seaport Plaza
New York, NY
*Harry A. Jacobs, Jr. (72) Director Senior Director (since January 1986) of Prudential
One Seaport Plaza Securities; formerly Interim Chairman and Chief
New York, NY Executive Officer of 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 First Australia
Fund, Inc., The First Australia Prime Income
Fund, Inc., The Global Government Plus Fund, Inc.
and The Global Total Return Fund, Inc.; Trustee
of The Trudeau Institute.
</TABLE>
- ------------
*"Interested" director, as defined in the Investment Company Act, by reason of
his affiliation with Prudential Securities or PMF.
B-11
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS
NAME, ADDRESS AND AGE POSITION WITH FUND DURING PAST FIVE YEARS
- ---------------------------- ----------------------- --------------------------------------------------
<S> <C> <C>
Thomas T. Mooney (52) Director President of the Greater Rochester Metro Chamber
c/o Prudential Mutual Fund of Commerce; former Rochester City Manager;
Management, Inc. Trustee of Center for Governmental Research,
One Seaport Plaza Inc.; Director of Blue Cross of Rochester, Monroe
New York, NY County Water Authority, Rochester Jobs, Inc.,
Northeast-Midwest Institute, Executive Service
Corps of Rochester, Monroe County Industrial
Development Corporation, First Financial Fund,
Inc., The Global Government Plus Fund, Inc., The
Global Total Return Fund, Inc. and The High Yield
Income Fund, Inc.
Thomas H. O'Brien (70) Director President, O'Brien Associates (financial and
c/o Prudential Mutual Fund management consultants) (since April 1984);
Management, Inc. formerly President of Jamaica Water Securities
One Seaport Plaza Corp. (holding company) (February 1989-August
New York, NY 1990); Chairman and Chief Executive Officer
(September 1987-February 1989) and Director
(September 1987-August 1990) of Jamaica Water
Supply Company; Director of Yankee Energy System,
Inc. and Ridgewood Savings Bank; Trustee of
Hofstra University.
Thomas A. Owens, Jr. (71) Director Consultant; Director of EMCORE Corp. (manufacturer
c/o Prudential Mutual Fund of electronic materials).
Management, Inc.
One Seaport Plaza
New York, NY
*Richard A. Redeker (50) Director and President President, Chief Executive Officer and Director
One Seaport Plaza (since October 1993), PMF; Executive Vice
New York, NY President, Director and Member of the Operating
Committee (since October 1993), Prudential
Securities; Director (since October 1993) of
Prudential Securities Group, Inc. (PSG);
Executive Vice President, The Prudential
Investment Corporation (since July 1994);
Director (since January 1994) of Prudential
Mutual Fund Distributors, Inc. (PMFD) and
Prudential Mutual Fund Services, Inc. (PMFS);
formerly Senior Executive Vice President and
Director of Kemper Financial Services, Inc.
(September 1978-September 1993); Director and
President of The Global Yield Fund, Inc., The
Global Government Plus Fund, Inc., The Global
Total Return Fund, Inc. and The High Yield Income
Fund, Inc.
</TABLE>
- ------------
*"Interested" director, as defined in the Investment Company Act, by reason of
his affiliation with Prudential Securities or PMF.
B-12
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS
NAME, ADDRESS AND AGE POSITION WITH FUND DURING PAST FIVE YEARS
- ---------------------------- ----------------------- --------------------------------------------------
<S> <C> <C>
Stanley E. Shirk (78) Director Certified Public Accountant and a former Senior
c/o Prudential Mutual Fund Partner of the accounting firm of KPMG Peat
Management, Inc. Marwick; former Management and Accounting
One Seaport Plaza Consultant for the Association of Bank Holding
New York, NY Companies, Washington, D.C. and the Bank
Administration Institute, Chicago, IL; Director
of The High Yield Income Fund, Inc.
David W. Drasnin (57) Vice President Vice President and Branch Manager of Prudential
39 Public Square, Securities.
Suite 500
Wilkes-Barre, PA
Robert F. Gunia (48) Vice President Director (since January 1989), Chief
One Seaport Plaza Administrative Officer (since July 1990), and
New York, NY Executive Vice President, Treasurer and Chief
Financial Officer (since June 1987) of PMF;
Senior Vice President (since March 1987) of
Prudential Securities; Executive Vice President,
Treasurer and Comptroller (since March 1991) of
PMFD; Director (since June 1987) of PMFS; Vice
President and Director of The Asia Pacific Fund,
Inc. (since May 1989).
Eugene S. Stark (37) Treasurer and Principal First Vice President (since January 1990) of PMF.
One Seaport Plaza Financial and
New York, NY Accounting Officer
S. Jane Rose (49) Secretary Senior Vice President (since January 1991), Senior
One Seaport Plaza Counsel (since June 1987) and First Vice
New York, NY President (June 1987-December 1990) of PMF;
Senior Vice President and Senior Counsel of
Prudential Securities (since July 1992); formerly
Vice President and Associate General Counsel of
Prudential Securities.
Ellyn C. Acker (34) Assistant Secretary Vice President and Associate General Counsel
One Seaport Plaza (since March 1995) of PMF; Vice President and
New York, NY Associate General Counsel of Prudential
Securities (since March 1995); prior thereto,
associated with the law firm of Fulbright &
Jaworski L.L.P.
</TABLE>
- ------------
*"Interested" director, as defined in the Investment Company Act, by reason of
his affiliation with Prudential Securities or PMF.
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.
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 $8,000, in addition to certain out-of-pocket
expenses. Directors may receive their Directors' fees pursuant to a deferred fee
arrangement with the Fund. Under the terms of the agreement, the Fund accrues
daily the amount of Directors' fees which accrue interest at a rate equivalent
to the prevailing rate applicable to 90-day U.S. Treasury Bills at the beginning
of each calendar quarter or at the daily rate 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 Directors'
fees, together with interest thereon, is a general obligation of the Fund.
B-13
<PAGE>
The following table sets forth the aggregate compensation paid by the Fund
for the fiscal year ended February 28, 1995 to the Directors who are not
affiliated with the Manager and the aggregate compensation paid to such
Directors for service on the Fund's Board and the Board of any other investment
companies managed by Prudential Mutual Fund Management, Inc. (Fund Complex) for
the calender year ended December 31, 1994.
COMPENSATION TABLE
<TABLE>
<CAPTION>
TOTAL
PENSION OR COMPENSATION
RETIREMENT FROM FUND AND
AGGREGATE BENEFITS ACCRUED ESTIMATED ANNUAL FUND COMPLEX
COMPENSATION AS PART OF FUND BENEFITS UPON PAID TO
NAME AND POSITION FROM FUND EXPENSES RETIREMENT DIRECTORS
- ------------------------------------------------- ------------- ----------------- ------------------- ---------------
<S> <C> <C> <C> <C>
Edward D. Beach, Director $ 8,000 None N/A $ 159,000(20)*
Delayne Dedrick Gold, Director $ 8,000 None N/A $ 185,000(24)*
Thomas T. Mooney, Director $ 8,000 None N/A $ 126,000(15)*
Thomas H. O'Brien, Director $ 8,000 None N/A $ 44,000 (6)*
Thomas A. Owens, Director $ 8,000 None N/A $ 100,500(12)*
Stanley E. Shirk, Director $ 8,000 None N/A $ 79,000 (8)*
</TABLE>
* Indicates number of funds in Fund Complex (including the Fund) to which
aggregate compensation relates.
As of April 13, 1995, the Directors and officers of the Fund, as a group,
owned less than 1% of the outstanding shares of the Fund.
As of April 13, 1995, Prudential Securities was the record holder for other
beneficial owners of 61,047,747 Class A shares (or 61% of the outstanding Class
A shares), 46,757,505 Class B shares (or 12% of the outstanding Class B shares)
and 7,168 Class C shares (or 26% of the outstanding Class C 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.
As of April 13, 1995, Irrevocable Trust of Doris H D, U/A DTD 8-3-93, John
L. Hughes TTEE, FBO Doris H. Dowden, P O Box 54, Crossville IL 62827-0054 owned
12,313 of Class C shares (or 45% of the outstanding Class C shares), Edward N.
Hutton, Harriett J. Hutton JTTEN, 1716 Havana, Seaside CA 93955-4004 owned 2,740
of Class C shares (or 10% of the outstanding Class C shares), and Lura A. Brown,
Wilbur L. Brown JTTEN, 10002 Hardesty, Kansas City MO 64137-1340 owned 2,542 of
Class C shares (or 9% of the outstanding Class C shares) of the Fund.
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, 1995, PMF managed and/or administered open-end and
closed-end management investment companies with assets of approximately $46
billion. According to the Investment Company Institute, as of August 31, 1994,
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 average daily net assets of the Fund up to
$3 billion and .35 of 1% of the average daily net assets of the Fund in excess
of $3 billion. The fee is computed daily and payable monthly. The Management
Agreement also provides that, in the event the
B-14
<PAGE>
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 to 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 February 28, 1995. 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.
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, including a majority of the
Directors who are not parties to the contract or interested persons of any such
party as defined in the Investment Company Act, on April 13, 1995 and by the
shareholders of the Fund on March 30, 1988.
For the fiscal years ended February 28, 1995, February 28, 1994 and February
28, 1993, the Fund paid management fees to PMF of $9,155,193, $12,719,555 and
$13,588,678, respectively.
PMF has entered into the Subadvisory Agreement with PIC (the Subadviser), a
wholly-owned subsidiary of 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.
B-15
<PAGE>
The Subadvisory Agreement was last approved by the Board of Directors,
including a majority of the Directors who are not parties to the contract or
interested persons of any such party as defined in the Investment Company Act,
on April 13, 1995, and by shareholders of the Fund on March 30, 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 (The Prudential Investment Corporation) are
indirect subsidiaries of The Prudential which, as of December 31, 1993, was the
largest insurance company in North America. Prudential has been engaged in the
insurance business since 1875. In July 1994, INSTITUTIONAL INVESTOR ranked The
Prudential the second largest institutional money manager of the 300 largest
money management organizations in the United States as of December 31, 1993.
DISTRIBUTOR
Prudential 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 Plans of Distribution (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.
On April 13, 1995, 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 Plan, Class B Plan
or Class C Plan or in any agreement related to any Plan (the Rule 12b-1
Directors), at a meeting called for the purpose of voting on each Plan, approved
the continuance of the Plans and Distribution Agreements. The Class A Plan
provides that (i) up to .25 of 1% of the average daily net assets of the Class A
shares may be used to pay for personal service and the maintenance of
shareholder accounts (service fee) and (ii) total distribution fees (including
the service fee of up to .25 of 1%) may not exceed .30 of 1%. 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 up to $3 billion, .55 of 1% of the next $1 billion of such
assets and .25 of 1% of such assets in excess of $4 billion (not including the
service fee) may be used for distribution-related expenses with respect to the
Class B shares. The Class C Plan provides that (i) up to .25 of 1% of the
average daily net assets of the Class C shares may be paid as a service fee and
(ii) approved by Class A and Class B shareholders, and the Class B Plan was
approved by Class B shareholders on July 19, 1994. The Class C Plan was approved
by the sole shareholder of Class C shares on August 1, 1994.
CLASS A PLAN. For the fiscal year ended February 28, 1995, PMFD received
payments of $143,341 under the Class A Plan. This amount was primarily expended
for payment of account servicing fees to financial advisers and other persons
who sell Class A shares. For the fiscal year ended February 28, 1995, PMFD also
received approximately $196,000 in initial sales charges.
CLASS B PLAN. For the fiscal year ended February 28, 1995, Prudential
Securities received $14,862,736 from the Fund under the Class B Plan and spent
approximately $4,206,800 in distributing the Class B shares of the Fund. It is
estimated that of the latter amount, approximately $60,300 (1.4%) was spent on
printing and mailing of prospectuses to other than current shareholders,
$2,581,500 (61.4%) on interest and carrying costs, $1,333,300 (31.7%) on
compensation to Pruco Securities Corporation, an affiliated broker-dealer, for
commissions to its representatives and other expenses, including an allocation
on account of overhead and other branch office distribution-related expenses
incurred by it for distribution of Fund shares; and $231,700 (5.5%) on the
aggregate of (i) payment of commissions and account servicing fees to financial
advisers ($72,900 or 1.7%), and (ii) an allocation on account of overhead and
other branch
B-16
<PAGE>
office distribution-related expenses ($158,800 or 3.8%). The term "overhead and
other branch office distribution-related expenses" represents (a) the expenses
of operating branch offices of Prusec and Prudential Securities 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. Prior to August 1, 1994, the Class A and B Plans
operated as "reimbursement type" plans and, in the case of Class B, provided for
the reimbursement of distribution expenses incurred in current and prior years.
Prudential Securities also receives the proceeds of contingent deferred
sales charges paid by investors upon certain redemptions of Class B shares. See
"Shareholder Guide--How to Sell Your Shares--Contingent Deferred Sales Charges"
in the Prospectus. For the fiscal year ended February 28, 1995, Prudential
Securities received approximately $3,123,000 in contingent deferred sales
charges attributable to the Class B shares.
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. For the period from August 1, 1994 (inception
of Class C shares) through February 28, 1995, Prudential Securities received
$484 under the Class C Plan and $98 in contingent deferred sales charges
attributable to Class C shares.
The Class A, Class B and Class C Plans continue in effect from year to year,
provided that each such continuance is approved at least annually by a vote of
the Board of Directors, including a majority 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
it is terminated or not continued.
Pursuant to each Plan, the Board of Directors will review at least quarterly
a written report of the distribution expenses incurred on behalf of each class
of shares of Fund by the Distributor. The report will include an itemization of
the distribution expenses and the purposes of such expenditures. In addition, as
long as the Plans remain in effect, the selection and nomination of the Rule
12b-1 Directors shall be committed to the Rule 12b-1 Directors.
Pursuant to 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. Each Distribution Agreement was
last approved by the Board of Directors, including a majority of the Rule 12b-1
Directors, on April 13, 1995.
NASD MAXIMUM SALES CHARGE RULE. Pursuant to rules of the NASD, the
Distributor is required to limit aggregate initial sales charges, deferred sales
charges and asset-based sales charges to 6.25% of total gross sales of each
class of shares. Interest charges on unreimbursed distribution expenses equal to
the prime rate plus one percent per annum may be added to the 6.25% limitation.
Sales from the reinvestment of dividends and distributions are not included in
the calculation of the 6.25% limitation. The annual asset-based sales charge on
shares of the Fund may not exceed .75 of 1% per class. The 6.25% limitation
applies to the Fund rather than on a per shareholder basis. If aggregate sales
charges were to exceed 6.25% of total gross sales of shares of any class, all
sales charges on shares of that class would be suspended.
On October 21, 1993, PSI entered into an omnibus settlement with the SEC,
state securities regulators in 51 jurisdictions and the NASD to resolve
allegations that PSI sold interests in more than 700 limited partnerships (and a
limited number of other types of securities) from January 1, 1980 through
December 31, 1990, in violation of securities laws to persons for whom such
securities were not suitable in light of the individuals' financial condition or
investment objectives. It was also alleged that the safety, potential returns
and liquidity of the investments had been misrepresented. The limited
partnerships principally involved real estate, oil and gas producing properties
and aircraft leasing ventures. The SEC Order (i) included findings that PSI's
conduct violated the federal securities laws and that an order issued by the SEC
in 1986 requiring PSI to adopt, implement and maintain certain supervisory
procedures had not been complied with;
B-17
<PAGE>
(ii) directed PSI to cease and desist from violating the federal securities laws
and imposed a $10 million civil penalty; and (iii) required PSI to adopt certain
remedial measures including the establishment of a Compliance Committee of its
Board of Directors. Pursuant to the terms of the SEC settlement, PSI established
a settlement fund in the amount of $330,000,000 and procedures, overseen by a
court approved Claims Administrator, to resolve legitimate claims for
compensatory damages by purchasers of the partnership interests. PSI has agreed
to provide additional funds, if necessary, for that purpose. PSI's settlement
with the state securities regulators included an agreement to pay a penalty of
$500,000 per jurisdiction. PSI consented to a censure and to the payment of a
$5,000,000 fine in settling the NASD action. In settling the above referenced
matters, PSI neither admitted nor denied the allegations asserted against it.
On January 18, 1994, PSI agreed to the entry of a Final Consent Order and a
Parallel Consent Order by the Texas Securities Commissioner. The firm also
entered into a related agreement with the Texas Securities Commissioner. The
allegations were that the firm had engaged in improper sales practices and other
improper conduct resulting in pecuniary losses and other harm to investors
residing in Texas with respect to purchases and sales of limited partnership
interests during the period of January 1, 1980 through December 31, 1990.
Without admitting or denying the allegations, PSI consented to a reprimand,
agreed to cease and desist from future violations, and to provide voluntary
donations to the State of Texas in the aggregate amount of $1,500,000. The firm
agreed to suspend the creation of new customer accounts, the general
solicitation of new accounts, and the offer for sale of securities in or from
PSI's North Dallas office to new customers during a period of twenty consecutive
business days, and agreed that its other Texas offices would be subject to the
same restrictions for a period of five consecutive business days. PSI also
agreed to institute training programs for its securities salesmen in Texas.
On October 27, 1994, Prudential Securities Group, Inc. (PSG) and PSI entered
into agreements with the United States Attorney deferring prosecution (provided
PSI complies with the terms of the agreement for three years) for any alleged
criminal activity related to the sale of certain limited partnership programs
from 1983 to 1990. In connection with these agreements, PSI agreed to add the
sum of $330,000,000 to the Fund established by the SEC and executed a
stipulation providing for a reversion of such funds to the United States Postal
Inspection Service. PSI further agreed to obtain a mutually acceptable outside
director to sit on the Board of Directors of PSG and the Compliance Committee of
PSI. The new director will also serve as an independent "ombudsman" whom PSI
employees can call anonymously with complaints about ethics and compliance.
Prudential Securities shall report any allegations or instances of criminal
conduct and material improprieties to the new director. The new director will
submit compliance reports which shall identify all such allegations or instances
of criminal conduct and material improprieties every three months for a
three-year period.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Manager is responsible for decisions to buy and sell securities, futures
contracts and options on such securities and futures for the Fund, the selection
of brokers, dealers and futures commission merchants to effect the transactions
and the negotiation of brokerage commissions, if any. For purposes of this
section, the term "Manager" includes the Subadviser. Broker-dealers may receive
brokerage commissions on Fund portfolio transactions, including options, futures
and options on futures transactions and the purchase and sale of underlying
securities upon the exercise of options. 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 the U.S. Government securities market, 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 and agency securities may be purchased directly from
the issuer, in which case no commissions or discounts are paid. The Fund will
not deal with Prudential Securities or its affiliates in any transaction in
which Prudential Securities or its affiliates act as principal. Thus, it will
not deal in U.S. Government securities with Prudential Securities or its
affiliates acting as market maker, and it will not execute a negotiated trade
with Prudential or its affiliates if execution involves Prudential Securities or
its affiliates acting as principal with respect to any part of the Fund's order.
Portfolio securities may not be purchased from any underwriting or selling
syndicate of which Prudential Securities or its affiliates, during the existence
of the syndicate, is a principal underwriter (as defined in the Investment
Company
B-18
<PAGE>
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.
In placing orders for portfolio securities of the Fund, the Manager is
required to give primary consideration to obtaining the most favorable price and
efficient execution. Within the framework of this policy, the Manager will
consider the research and investment services provided by brokers, dealers or
futures commission merchants who effect or are parties to portfolio transactions
of the Fund, the Manager or the Manager's other clients. Such research and
investment services are those which brokerage houses customarily provide to
institutional investors and include statistical and economic data and research
reports on particular companies and industries. Such services are used by the
Manager in connection with all of its investment activities, and some of such
services obtained in connection with the execution of transactions for the Fund
may be used in managing other investment accounts. Conversely, brokers, dealers
or futures commission merchants furnishing such services may be selected for the
execution of transactions of such other accounts, whose aggregate assets are far
larger than the Fund's, and the services furnished by such brokers, dealers or
futures commission merchants may be used by the Manager in providing investment
management for the Fund. Commission rates are established pursuant to
negotiations with the broker, dealer or futures commission merchant based on the
quality and quantity of execution services provided by the broker or futures
commission merchant in the light of generally prevailing rates. The Manager's
policy is to pay higher commissions to brokers and futures commission merchants,
other than Prudential Securities, for particular transactions than might be
charged if a different broker had been selected, on occasions when, in the
Manager's opinion, this policy furthers the objective of obtaining best price
and execution. In addition, the Manager is authorized to pay higher commissions
on brokerage transactions for the Fund to brokers and futures commission
merchants other than Prudential Securities in order to secure research and
investment services described above, subject to review by the Fund's Board of
Directors from time to time as to the extent and continuation of this practice.
The allocation of orders among brokers and futures commission merchants and the
commission rates paid are reviewed periodically by the Fund's Board of
Directors.
Subject to the above considerations, Prudential Securities may act 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 such brokers or futures commission merchants
in connection with comparable transactions involving similar securities or
futures contracts being purchased or sold on an exchange or board of trade
during a comparable period of time. This standard would allow Prudential
Securities (or any affiliate) to receive no more than the remuneration which
would be expected to be received by an unaffiliated broker or futures commission
merchant in a commensurate arms-length transaction. Furthermore, the Board of
Directors of the Fund, including a majority of the non-interested Directors, has
adopted procedures which are reasonably designed to provide that any
commissions, fees or other remuneration paid to Prudential Securities (or any
affiliate) are consistent with the foregoing standard. In accordance with
Section 11(a) of the Securities Exchange Act of 1934, Prudential Securities may
not retain compensation for effecting transactions on a national securities
exchange for the Fund unless the Fund has expressly authorized the retention of
such compensation. Prudential Securities must furnish to the Fund at least
annually a statement setting forth the total amount of all compensation retained
by Prudential Securities from transactions effected for the Fund during the
applicable period. Brokerage and futures transactions with Prudential Securities
(or any affiliate) are also subject to such fiduciary standards as may be
imposed upon Prudential Securities (or such affiliate) by applicable law.
During the fiscal years ended February 28, 1995, February 28, 1994 and
February 29, 1993, the Fund paid no brokerage commissions to Prudential
Securities.
B-19
<PAGE>
PURCHASE AND REDEMPTION OF FUND SHARES
Shares of the Fund may be purchased at a price equal to the next determined
net asset value 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 SEC 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."
SPECIMEN PRICE MAKE-UP
Under the current distribution arrangements between the Fund and the
Distributor, Class A shares are sold at a maximum sales charge of 4% and Class
B* and Class C* shares are sold at net asset value. Using the Fund's net asset
value at February 28, 1995, 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............. $ 8.59
Maximum sales charge (4% of offering price)........................ .36
---------
Offering price to public........................................... $ 8.95
---------
---------
CLASS B
Net asset value, offering price and redemption price per Class B
share*........................................................... $ 8.60
---------
---------
CLASS C
Net asset value, offering price and redemption price per Class C
share*........................................................... $ 8.60
---------
---------
</TABLE>
- ------------
* Class B and Class C shares are subject to a contingent deferred sales
charge on certain redemptions. See "Shareholder Guide--How to Sell Your
Shares--Contingent Deferred Sales Charges" in the Prospectus.
REDUCTION AND WAIVER OF INITIAL SALES CHARGES--CLASS A SHARES
COMBINED PURCHASE AND CUMULATIVE PURCHASE PRIVILEGE. If an investor or
eligible group of related investors purchases Class A shares of the Fund
concurrently with Class A shares of other Prudential Mutual Funds, the purchases
may be combined to take advantage of the reduced sales charges applicable to
larger purchases. See the table of breakpoints under "Shareholder
Guide--Alternative Purchase Plan" in the Prospectus.
An eligible group of related Fund investors includes any combination of the
following:
(a) an individual;
(b) the individual's spouse, their children and their parents;
(c) the individual's and spouse's Individual Retirement Account (IRA);
(d) any company controlled by the individual (a person, entity or group that
holds 25% or more of the outstanding voting securities of a corporation will be
deemed to control the corporation, 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.
B-20
<PAGE>
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 investors holdings. The Combined Purchase and
Cumulative Purchase Privilege does not apply to individual participants in any
retirement or group plans.
RIGHTS OF ACCUMULATION. Reduced sales charges are also available through
Rights of Accumulation, under which an investor or an eligible group of related
investors, as described above under "Combined Purchase and Cumulative Purchase
Privilege," may aggregate the value of their existing holdings of the 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 or 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.
LETTERS OF INTENT. Reduced sales charges are available to investors (or an
eligible group of related investors), including retirement and group plans, who
enter into a written Letter of Intent providing for the purchase, within a
thirteen-month period, of shares of the Fund and shares of other Prudential
Mutual Funds. 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 any 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, except in the case of retirement and group plans where the employer
or plan sponsor will be responsible for paying any applicable sales charge. The
effective date of 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, except in
the case of retirement and group plans.
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 (or the employer or
plan sponsor in the case of any retirement or group plan) is required to pay the
difference between the sales charge otherwise applicable to the purchases made
during this period and sales 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 difference. Investors electing to
purchase Class A shares of the Fund pursuant to a Letter of Intent should
carefully read such Letter of Intent.
B-21
<PAGE>
WAIVER OF THE CONTINGENT DEFERRED SALES CHARGE--CLASS B SHARES
The contingent deferred sales charge is waived under circumstances described
in the Prospectus. See "Shareholder Guide--How to Sell Your Shares--Waiver of
the Contingent Deferred Sales Charges--Class B Shares" in the Prospectus. In
connection with these waivers, the Transfer Agent will require you to submit the
supporting documentation set forth below.
<TABLE>
<S> <C>
CATEGORY OF WAIVER REQUIRED DOCUMENTATION
Death A copy of the shareholder's death certificate
or, in the case of a trust, a copy of the
grantor's death certificate, plus a copy of
the trust agreement identifying the grantor.
Disability--An individual will be considered A copy of the Social Security Administration
disabled if he or she is unable to engage in award letter or a letter from a physician on
any substantial gainful activity by reason of the physician's letterhead stating that the
any medically determinable physical or mental shareholder (or, in the case of a trust, the
impairment which can be expected to result in grantor) is permanently disabled. The letter
death or to be of long-continued and must also indicate the date of disability.
indefinite duration.
Distribution from an IRA or 403(b) Custodial A copy of the distribution form from the
Account custodial firm indicating (i) the date of
birth of the shareholder and (ii) that the
shareholder is over age 59 1/2 and is taking
a normal distribution--signed by the
shareholder.
Distribution from Retirement Plan A letter signed by the plan
administrator/trustee indicating the reason
for the distribution.
Excess Contributions A letter from the shareholder (for an IRA) or
the plan administrator/trustee on company
letterhead indicating the amount of the
excess and whether or not taxes have been
paid.
</TABLE>
The Transfer Agent reserves the right to request such additional documents
as it may deem appropriate.
QUANTITY DISCOUNT--CLASS B SHARES PURCHASED PRIOR TO AUGUST 1, 1994
The CDSC is reduced on redemptions of Class B shares of the Fund purchased
prior to August 1, 1994 if immediately after a purchase of such shares, the
aggregate cost of all Class B shares of the Fund owned by you in a single
account exceeded $500,000. For example, if you purchased $100,000 of Class B
shares of the Fund and the following year purchased an additional $450,000 of
Class B shares with the result that the aggregate cost of your Class B shares of
the Fund following the second purchase was $550,000, the quantity discount would
be available for the second purchase of $450,000 but not for the first purchase
of $100,000. The quantity discount will be imposed at the following rates
depending on whether the aggregate value exceeded $500,000 or $1 million:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES CHARGE
AS A PERCENTAGE OF DOLLARS INVESTED
OR REDEMPTION PROCEEDS
YEAR SINCE PURCHASE -----------------------------------------------
PAYMENT MADE $500,001 TO $1 MILLION OVER $1 MILLION
- ----------------------------------- ------------------------ ----------------
<S> <C> <C>
First.............................. 3.0% 2.0%
Second............................. 2.0% 1.0%
Third.............................. 1.0% 0%
Fourth and thereafter.............. 0% 0%
</TABLE>
You must notify the Fund's Transfer Agent either directly or through
Prudential Securities or Prusec, at the time of redemption, that you are
entitled to the reduced CDSC. The reduced CDSC will be granted subject to
confirmation of your holdings.
B-22
<PAGE>
SHAREHOLDER INVESTMENT ACCOUNT
Upon the initial purchase of Fund shares, a Shareholder Investment Account
is established for each investor under which the shares are held for the
investor by the Transfer Agent. If a stock certificate is desired, it must be
requested in writing for each transaction. Certificates are issued only for full
shares and may be redeposited in the Account at any time. There is no charge to
the investor for issuance of a certificate. The Fund makes available to 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. An investor
may direct the Transfer Agent in writing not less than 5 full business days
prior to the payment 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 payment 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. Such shareholder will receive credit for any contingent
deferred sales charge paid in connection with the amount of proceeds being
reinvested.
EXCHANGE PRIVILEGE
The Fund makes available to its shareholders the privilege of exchanging
their shares of the Fund for shares of certain other Prudential Mutual Funds,
including one or more specified money market funds, subject in each case to the
minimum investment requirements of such funds. Shares of such other Prudential
Mutual Funds may also be exchanged for shares of the Fund. All exchanges are
made on the basis of relative 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
B-23
<PAGE>
Fund, a money market fund. No CDSC will be payable upon such exchange, but a
CDSC may be payable upon the redemption of Class B and Class C shares acquired
as a result of the 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 initial purchase, rather than the
date of the exchange.
Class B and Class C shares of the Fund may also be exchanged for shares of
Prudential Special 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 will be subject to the CDSC calculated
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 the 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, respectively, shares of other funds 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)
B-24
<PAGE>
The following chart shows how much you would need in monthly investments to
achieve specified lump sums to finance your investment goals.(2)
<TABLE>
<CAPTION>
PERIOD OF
MONTHLY INVESTMENTS: $100,000 $150,000 $200,000 $250,000
- ------------------------------------------------------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
25 Years.................................................... $ 110 $ 165 $ 220 $ 275
20 Years.................................................... 176 264 352 440
15 Years.................................................... 296 444 592 740
10 Years.................................................... 555 833 1,110 1,388
5 Years.................................................... 1,371 2,057 2,742 3,428
</TABLE>
See "Automatic Savings Accumulation Plan."
- -------------
(1) Source information concerning the costs of education at public universities
is available from The College Board Annual Survey of Colleges, 1992. Information
about the costs of private colleges is from the Digest of Education Statistics,
1992; The National Center for Educational Statistics; and the U.S. Department of
Education. Average costs for private institutions include tuition, fees, room
and board.
(2) The chart assumes an effective rate of return of 8% (assuming monthly
compounding). This example is for illustrative purposes only and is not intended
to reflect the performance of an investment in shares of the Fund. The
investment return and principal value of an investment will fluctuate so that an
investor's shares when redeemed may be worth more or less than their original
cost.
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. Stock 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" in the Prospectus.
In the case of shares held through the Transfer Agent (i) a $10,000 minimum
account values 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 "Shareholder Investment
Account--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 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 be recognized for federal income tax purposes. In
addition, withdrawals made concurrently with purchases of additional shares are
inadvisable because of the sales charges applicable to (i) the purchase of Class
A shares and (ii) the withdrawal of Class B and Class C shares. Each shareholder
should consult his or her own tax adviser with regard to the tax consequences of
the systematic withdrawal plan, particularly if used in connection with a
retirement plan.
B-25
<PAGE>
TAX-DEFERRED RETIREMENT PLANS
Various tax-deferred retirement plans, including a 401(k) plan,
self-directed individual retirement accounts and "tax-sheltered accounts" under
Section 403(b)(7) of the Internal Revenue Code are available through the
Distributor. These plans are for use by both self-employed individuals and
corporate employers. These plans permit either self-direction of accounts by
participants, or a pooled account arrangement. Information regarding the
establishment of these plans, the administration, custodial fees and other
details are available from Prudential Securities or the Transfer Agent.
Investors who are considering the adoption of such a plan should consult
with their own legal counsel or tax adviser with respect to the establishment
and maintenance of any such plan.
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 personal savings account with those in an IRA, assuming a $2,000
annual contribution, an 8% rate of return and a 39.6% federal income tax bracket
and shows how much more retirement income can accumulate within an IRA as
opposed to a taxable individual savings account.
<TABLE>
<CAPTION>
TAX-DEFERRED COMPOUNDING(1)
CONTRIBUTIONS PERSONAL
MADE OVER: SAVINGS IRA
-------------------- -------- --------
<S> <C> <C>
10 years............ $ 26,165 $ 31,291
15 years............ 44,675 58,649
20 years............ 68,109 98,846
25 years............ 97,780 157,909
30 years............ 135,346 244,692
</TABLE>
- ------------
(1) The chart is for illustrative purposes only and does not represent the
performance of the Fund or any specific investment. It shows taxable versus
tax-deferred compounding for the periods and on the terms indicated. Earnings in
the IRA account will be subject to tax when withdrawn from the account.
NET ASSET VALUE
Under the Investment Company Act, the Board of Directors is responsible for
determining in good faith the fair value of securities of the Fund. In
accordance with procedures adopted by the Board of Directors, the value of each
U.S. Government security for which quotations are available will be based on the
valuations provided by a pricing service which uses information with respect to
transactions in bonds, quotations from bond dealers, agency ratings, market
transactions in comparable securities and various relationships between
securities in determining value. Options on U.S. Government securities traded on
an exchange are valued at the mean between the most recently quoted bid and
asked prices on the respective exchange. Futures contracts and options thereon
are valued at their last sales prices as of the close of the commodities
exchange or board of trade or, if there was no sale on such day, the mean
between the most recently quoted bid and asked prices on such exchange or board
of trade. Should an extraordinary event, which is likely to affect the value of
the security, occur after the close of an exchange on which a portfolio security
is traded, such security will be valued at fair value considering factors
determined in good faith by the investment adviser under procedures established
by and under the general supervision of the Fund's Board of Directors.
The Fund will compute its net asset value 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 net
asset value. In the event the New York Stock Exchange closes early on any
business day, the net asset value of the Fund's shares shall be determined at a
time between such closing and 4:15 P.M., New York time.
Net asset value is calculated separately for each class. As long as the Fund
declares dividends daily, the net asset value of 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.
B-26
<PAGE>
TAXES, DIVIDENDS AND DISTRIBUTIONS
GENERAL. The Fund has elected to qualify and intends to remain qualified as
a regulated investment company under Subchapter M of the Internal Revenue Code
for each taxable year. Accordingly, the Fund must, among other things, (a)
derive at least 90% of its gross income (without offset for losses from the sale
or other disposition of securities or foreign currencies) from dividends,
interest, proceeds from loans of securities and gains from the sale or other
disposition of securities or foreign currencies or other income, including, but
not limited to, gains derived from options and futures on such securities or
foreign currencies; (b) derive less than 30% of its gross income from gains
(without offset for losses) from the sale or other disposition of securities or
options thereon held less than three months; and (c) diversify its holdings so
that, at the end of each fiscal quarter, (i) 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 Fund's assets and no more than 10% of the outstanding voting
securities of any such issuer, and (ii) not more than 25% of the value of its
assets is invested in the securities of any one issuer (other than U.S.
Government securities). These requirements may limit the Fund's ability to
engage in transactions involving options on securities, interest rate futures
and options thereon.
The Fund has received a private letter ruling from the Internal Revenue
Service (IRS) to the effect that the Fund's investments in options on U.S.
Government securities, in interest rate futures contracts and in options thereon
will be treated as "securities" for purposes of the foregoing requirements for
qualification under Subchapter M of the Internal Revenue Code.
As a regulated investment company, the Fund will not be subject to federal
income tax on its net investment income and capital gains, if any, that it
distributes to its shareholders, provided that it distributes at least 90% of
its net investment income and short-term capital gains earned in each year.
Distributions of net investment income and net short-term capital gains will be
taxable to the shareholder at ordinary income rates regardless of whether the
shareholder receives such distributions in additional shares or in cash.
Distributions of net long-term capital gains, if any, are taxable as long-term
capital gains regardless of how long the investor has held his or her Fund
shares. However, if a shareholder holds shares in the Fund for not more than six
months, then any loss recognized on the sale of such shares will be treated as
long-term capital loss to the extent of any distribution on the shares which was
treated as long-term capital gain. Shareholders will be notified annually by the
Fund as to the federal tax status of distributions made by the Fund. A 4%
nondeductible excise tax will be imposed on the Fund to the extent the Fund does
not meet certain distribution requirements by the end of each calendar year.
Distributions may be subject to additional state and local taxes. See "Taxes,
Dividends and Distributions" in the Prospectus.
Although the Fund does not receive interest payments on zero-coupon bonds in
cash, it is required to accrue interest on such bonds for tax purposes.
Accordingly, in order to meet the requirement that it distribute at least 90% of
its net investment income and net short term gains earned in each taxable year,
the Fund may have to liquidate securities or borrow money. To date, the Fund has
not engaged in borrowing or liquidated securities solely or primarily for the
purpose of meeting income distribution requirements attributable to investments
in zero coupon bonds.
The Fund has a capital loss carryforward for federal income tax purposes as
of February 28, 1995 of approximately $140,517,000, of which $34,965,000 expires
in 1998, $41,965,000 expires in 1999 and $63,587,000 expires in 2003.
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 or distribution 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 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 for Class A, Class B and Class C shares. See "Net Asset Value."
LISTED OPTIONS AND FUTURES. Exchange-traded futures contracts, listed
options on futures contracts and listed options on U.S. Government securities
constitute "Section 1256 contracts" under the Internal Revenue Code. Section
1256
B-27
<PAGE>
contracts are required to be "marked-to-market" at the end of the Fund's tax
year; that is, treated as having been sold at market value. Sixty percent of any
gain or loss recognized as a result of such "deemed sales" will be treated as
long-term capital gain or loss and the remainder will be treated as short-term
capital gain or loss. The Fund has received a private letter ruling from the IRS
to the effect that a "deemed sale" of a security held for less than three months
at the end of a tax year will not result in gain from the sale of securities
held for less than three months for purposes of determining qualification of the
Fund as a regulated investment company. To the extent that the Section 1256
contracts are considered to be part of a "designated hedge" with U.S. Government
securities, pursuant to regulations to be promulgated under the Internal Revenue
Code, the increases or decreases in the value of the Section 1256 contract would
be netted with the increases or decreases in the U.S. Government securities for
the purpose of determining gains from securities held for less than three
months.
If the Fund holds a U.S. Government security which is offset by a Section
1256 contract, the Fund is considered to hold a "mixed straddle". The Fund may
elect whether to make a straddle-by-straddle identification of mixed straddles.
By electing to identify its mixed straddles, the Fund can avoid the application
of certain rules which could, in some circumstances, cause deferral or
disallowance of losses, the change of long-term capital gains into short-term
capital gains, or the change of short-term capital losses into long-term capital
losses. Nevertheless, the Fund would be subject to the following rules.
If the Fund owns a U.S. Government security and acquires an offsetting
Section 1256 contract in a transaction which the Fund elects to identify as a
mixed straddle, the acquisition of the offsetting position will result in
recognition of the unrealized gain or loss on the U.S. Government security. This
gain or loss will be long-term or short-term depending on the holding period of
the security at the time the mixed straddle is entered into. This recognition of
unrealized gain or loss will be taken into account in determining the amount of
income available for the Fund's quarterly distributions, and can result in an
amount which is greater or less than the Fund's net realized gains being
available for such distributions. If an amount which is less than the Fund's net
realized gains is available for distribution, the Fund may elect to distribute
more than such available amount, up to the full amount of such net realized
gains.
The rules for determining whether gain or loss upon exercise, expiration or
termination of an identified mixed straddle will be treated as long-term,
short-term, or sixty percent long-term and forty percent short-term are complex.
In general, which treatment applies will depend upon the order of disposition of
the Section 1256 and the non-Section 1256 positions of a straddle and whether
all or fewer than all of such positions are disposed of on any day.
If the Fund does not elect to identify a mixed straddle, no recognition of
gain or loss on the U.S. Government securities in the Fund's portfolio will
result when the mixed straddle is entered into. However, any losses realized on
the straddle will be governed by a number of tax rules which might, under
certain circumstances, defer or disallow the losses in whole or in part, change
long-term gains into short-term gains, or change short-term losses into
long-term losses. A deferral or disallowance of recognition of a realized loss
may result in the Fund being required to distribute an amount greater than the
Fund's net realized gains.
The Fund may also elect under Section 1256(d) of the Internal Revenue Code
that the provisions of Section 1256 will not apply. In the case of such an
election, the taxation of options on U.S. Government securities and the taxation
of futures will be governed by provisions of the Internal Revenue Code dealing
with taxation of capital assets generally.
OTC OPTIONS. Non-listed options on U.S. Government securities (OTC options)
are not Section 1256 contracts. If an OTC option written by the Fund on U.S.
Government securities expires, the amount of the premium will be treated as
short-term capital gain. If the option is terminated through a closing purchase
transaction, the Fund will generally recognize a short-term capital gain or
loss, depending on whether the premium income is greater or less than the amount
paid by the Fund in the closing transaction. If U.S. Government securities are
delivered by the Fund upon exercise of a written call option, or sold to the
Fund upon exercise of a written put option, the premium received when the option
was written will be treated as an addition to the proceeds received in the case
of the call option, or a decrease in the cost basis of the security received in
the case of a put option. The gain or loss realized on the exercise of a written
call option will be long-term or short-term depending upon the holding period of
the U.S. Government security delivered.
The premium paid for a purchased put or call option is a capital
expenditure, and loss will be realized on the expiration, and gain or loss will
be realized upon the sale of, a put or call option. The characterization of the
gain or loss as short-term or long-term will depend upon the holding period of
the option. If U.S. Government securities are purchased by
B-28
<PAGE>
the Fund upon exercise of a purchased call option, or delivered by the Fund upon
exercise of a purchased put option, the premium paid when the option was
purchased will be treated as an addition to the basis of the securities
purchased in the case of a call option, or as a decrease in the proceeds
received for the securities delivered in the case of a put option.
Losses realized on straddles which include a purchased put option, can,
under certain circumstances, be subject to a number of tax rules which might
defer or disallow the losses in whole or in part, change long-term gains into
short-term gains, or change short-term losses into long-term losses. As noted
above, a deferral or disallowance of recognition of realized loss can result in
the Fund being required to distribute an amount greater than the Fund's net
realized gains.
PENNSYLVANIA PERSONAL PROPERTY TAX. The Fund has obtained a written letter
of determination from the Pennsylvania Department of Revenue that the Fund is
subject to the Pennsylvania foreign franchise and corporate net income tax.
Accordingly, it is expected that Fund shares will be 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.
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 net asset value per share on
the last day of this period.
Yield is calculated according to the following formula:
a - b
YIELD = 2[( ------- +1)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 yield for the 30-day period ended February 28, 1995 for the Fund's Class
A, Class B and Class C shares was 6.61%, 6.13% and 6.26%, respectively.
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. Actual yields will depend upon not only changes in interest rates
generally during the period in which the investment in the Fund is held, but
also on any realized or unrealized gains and losses and changes in the Fund's
expenses.
AVERAGE ANNUAL TOTAL RETURN. The Fund may from time to time 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 investment made at
the beginning of the 1, 5 or 10 year periods at the end of the 1, 5
or 10 year periods (or fractional portion thereof).
Average annual 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 for Class A shares for the one year, five
year and five year and one month periods ended on February 28, 1995 was (3.20)%,
6.96% and 6.70%, respectively. The average annual total return with respect to
B-29
<PAGE>
the Class B shares of the Fund for the one, five and nine and three quarter year
periods ended February 28, 1995 was (4.76)%, 6.85% and 7.75%, respectively. The
inception to date total return for Class C shares for the seven month period
ended February 28, 1995, was 1.75%.
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:
ERV - P
-------
P
Where: P = a hypothetical initial payment of $1000.
ERV = ending redeemable value of a hypothetical $1000 payment made at
the beginning of the 1, 5 or 10 year periods at the end 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 aggregate total return for Class A shares for the one year, five year
and five year and one month periods ended February 28, 1995 was .83%, 45.81% and
44.97%, respectively. The aggregate total return for Class B shares for the one,
five and nine and three quarter year periods ended February 28, 1995 was .24%,
40.25% and 108.57%, respectively. The aggregate total return for Class C shares
for the seven month period ended February 28, 1995 was 2.75%.
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)
[GRAPH OF LONG-TERM PERFORMANCE (1926-1992) OF COMMON STOCKS AND LONG-
TERM GOVERNMENT BONDS, AND INFLATION RATE.]
(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-30
<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.
Prudential Mutual Fund Services, Inc. (PMFS), Raritan Plaza One, Edison, New
Jersey 08837, serves as the Transfer and Dividend Disbursing Agent of the Fund.
It is a wholly-owned subsidiary of 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, 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 February 28, 1995, the Fund incurred fees of approximately $2,001,000 for
the services of PMFS.
Deloitte & Touche LLP, Two World Financial Center, New York, New York 10281,
serves as the Fund's independent accountants and in that capacity audits the
Fund's annual financial statements.
B-31
<PAGE>
PRUDENTIAL GOVERNMENT INCOME FUND Portfolio of Investments
February 28, 1995
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
(000) DESCRIPTION (NOTE 1)
<C> <S> <C>
LONG-TERM INVESTMENTS--95.2%
U.S. GOVERNMENT AGENCY
SECURITIES--46.9%
Federal Home Loan Mortgage
Corp.,
$ 81,913 8.00%, 1/01/22 - 9/01/24... $ 81,401,413
50,000 8.20%, 1/16/98............. 51,187,500
7,821 8.50%, 6/01/07 - 4/01/20... 7,888,122
3,993 11.50%, 10/01/19........... 4,302,276
Federal National Mortgage
Assoc.,
6.50%, 10/01/23 -
25,525 6/01/24.................... 23,370,929
7.00%, 11/01/23 -
55,769# 5/01/24.................... 52,631,903
89,285 7.50%, 5/01/07 - 3/01/25... 87,487,955
20,000 7.93%, 2/14/25............. 19,801,600
55,000 8.50%, 6/01/17 - 3/01/25... 55,691,196
Trust 1991 G-37 Class C,
42 (I/O*)..................... 379,303
Government National Mortgage Assoc.,
6.50%, 5/15/23 -
58,718 10/15/24................... 53,084,682
7.00%, 2/15/09 -
72,648 11/15/24................... 68,039,509
3,718 7.25%, 7/15/23............. 3,452,263
35,152 7.50%, 5/15/02 - 2/15/25... 34,000,816
48,397 8.00%, 7/15/16 - 3/15/24... 48,485,100
57 8.50%, 5/15/22 - 2/15/25... 58,328
96,512 9.00%, 4/15/01 - 1/15/17... 100,712,486
9.50%, 7/15/16 -
31,392 12/15/17................... 33,256,201
Government National Mortgage Assoc. II,
6,689 9.50%, 5/20/18 - 8/20/21... 6,977,674
Resolution Funding Corp.,
50,000 Zero Coupon, 7/15/20....... 6,932,000
--------------
Total U.S. Government
Agency Securities (cost
$738,288,900).............. 739,141,256
--------------
U.S. GOVERNMENT OBLIGATIONS--45.3%
United States Treasury
Bonds,
$ 1,400 7.625%, 2/15/25............ $ 1,427,566
104,500 11.25%, 2/15/15............ 143,834,845
68,000 12.00%, 8/15/13............ 93,542,160
50,000 12.50%, 8/15/14............ 71,765,500
111,500+ 14.00%, 11/15/11........... 168,591,345
United States Treasury
Notes,
50,000+ 6.00%, 11/30/97............ 48,898,500
20,000 7.375%, 5/15/96............ 20,168,800
45,000 7.50%, 2/15/05............. 45,900,000
75,000+ 8.25%, 7/15/98............. 77,883,000
United States Treasury
Strips,
37,600 Zero Coupon, 5/15/15....... 6,780,784
37,600 Zero Coupon, 5/15/16....... 6,235,960
200,000 Zero Coupon, 5/15/20....... 29,384,000
--------------
Total U.S. Government
Obligations
(cost $716,957,042)........ 714,412,460
--------------
ASSET-BACKED SECURITIES--2.6%
Standard Credit Card Master
Trust I,
Series 1995 -1A, 8.25%,
1/07/07
40,000 (cost $40,312,500)......... 41,381,250
--------------
ADJUSTABLE RATE MORTGAGE
PASS-THROUGHS--0.4%
Ryland Mortgage Securities Corporation,
Mortgage Participation Securities,
Series 1993-3, Class A-3,
7.199%, 9/25/24
5,948 (cost $6,066,583).......... 5,893,742
--------------
Total long-term investments
(cost $1,501,625,025)...... 1,500,828,708
--------------
</TABLE>
See Notes to Financial Statements.
B-32
<PAGE>
PRUDENTIAL GOVERNMENT INCOME FUND
<TABLE>
<CAPTION>
Principal
Amount Value
(000) Description (Note 1)
<C> <S> <C>
SHORT-TERM INVESTMENTS--8.5%
TIME DEPOSIT--5.0%
Fuji Bank Chicago,
6.125%, 3/01/95
$ 78,465 (cost $78,465,000)....... $ 78,465,000
--------------
REPURCHASE AGREEMENT++--1.6%
First Boston Corp.,
6.00%, dated 2/28/95, due
3/07/95 in the amount of
$25,644,640
(cost $25,632,000; the
value of collateral
including accrued
interest is
25,632 $26,242,803)............. 25,632,000
--------------
U.S. GOVERNMENT OBLIGATION--1.3%
United States Treasury
Note,
11.25%, 5/15/95
20,000 (cost $20,209,400)....... 20,209,400
--------------
COMMERCIAL PAPER--0.6%
Societe General,
6.00%, 3/01/95
10,000 (cost $10,000,000)....... 10,000,000
--------------
Total short-term
investments
(cost $134,306,400)...... 134,306,400
--------------
TOTAL INVESTMENTS--103.7%
(cost $1,635,931,425;
Note 4).................. 1,635,135,108
Liabilities in excess of
other assets--(3.7%)..... (58,054,181)
--------------
NET ASSETS--100%........... $1,577,080,927
--------------
--------------
<FN>
- ---------------
I/O--Interest Only.
* REMIC--Real Estate Mortgage Investment Conduit.
# Mortgage dollar roll, see Note 1.
+ Partial principal amount pledged as collateral for mortgage dollar roll.
++ Repurchase agreements are collateralized by U.S. Treasury obligations.
</TABLE>
See Notes to Financial Statements.
B-33
<PAGE>
PRUDENTIAL GOVERNMENT INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
ASSETS FEBRUARY 28, 1995
-----------------
<S> <C>
Investments, at value (cost $1,635,931,425)............................................ $ 1,635,135,108
Receivable for investments sold........................................................ 97,713,112
Interest receivable.................................................................... 13,915,597
Receivable for Fund shares sold........................................................ 534,129
Deferred expenses and other assets..................................................... 180,382
-----------------
Total assets......................................................................... 1,747,478,328
-----------------
LIABILITIES
Payable for investments purchased...................................................... 114,269,978
Payable for dollar roll................................................................ 45,859,375
Payable for Fund shares reacquired..................................................... 6,275,706
Accrued expenses and other liabilities................................................. 2,049,764
Distribution fee payable............................................................... 654,264
Dividends payable...................................................................... 647,828
Management fee payable................................................................. 640,486
-----------------
Total liabilities.................................................................... 170,397,401
-----------------
NET ASSETS............................................................................. $ 1,577,080,927
-----------------
-----------------
Net assets were comprised of:
Common stock, at par................................................................. $ 1,835,209
Paid-in capital in excess of par..................................................... 1,749,373,598
-----------------
1,751,208,807
Accumulated net realized losses on investments....................................... (173,331,563)
Net unrealized depreciation on investments........................................... (796,317)
-----------------
Net assets at February 28, 1995.................................................... $ 1,577,080,927
-----------------
-----------------
Class A:
Net asset value and redemption price per share
($871,145,036 / 101,406,826 shares of common stock issued and outstanding)......... $8.59
Maximum sales charge (4.0% of offering price)........................................ .36
------
Maximum offering price to public..................................................... $8.95
------
------
Class B:
Net asset value, offering price and redemption price per share
($705,731,938 / 82,090,371 shares of common stock issued and outstanding).......... $8.60
------
------
Class C:
Net asset value, offering price and redemption price per share
($203,953 / 23,721 shares of common stock issued and outstanding).................. $8.60
------
------
</TABLE>
See Notes to Financial Statements.
B-34
<PAGE>
PRUDENTIAL GOVERNMENT INCOME FUND
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED
FEBRUARY 28,
NET INVESTMENT INCOME 1995
--------------
<S> <C>
Income
Interest (net of swap interest
expense of $150,865)............ $ 143,837,354
Income from securities
loaned-net...................... 71,213
--------------
143,908,567
--------------
Expenses
Distribution fee--Class A......... 143,341
Distribution fee--Class B......... 14,862,736
Distribution fee--Class C......... 484
Management fee.................... 9,155,193
Transfer agent's fees and
expenses........................ 2,492,000
Custodian's fees and expenses..... 1,430,000
Reports to shareholders........... 700,000
Franchise taxes................... 545,000
Registration fees................. 80,000
Legal fees........................ 63,000
Insurance expense................. 60,000
Audit fee......................... 58,000
Directors' fees................... 48,000
Miscellaneous..................... 47,263
--------------
Total expenses.................. 29,685,017
--------------
Net investment income............... 114,223,550
--------------
REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS
Net realized gain (loss):
Investment transactions........... (95,352,332)
Interest rate swap transaction.... 761,247
Written option transactions....... 697,656
--------------
(93,893,429)
--------------
Net change in unrealized
appreciation/depreciation:
Investments....................... (40,180,178)
Interest rate swap................ 709,355
--------------
(39,470,823)
--------------
Net loss on investments............. (133,364,252)
--------------
NET DECREASE IN NET ASSETS
RESULTING FROM OPERATIONS........... $ (19,140,702)
--------------
--------------
</TABLE>
See Notes to Financial Statements.
PRUDENTIAL GOVERNMENT INCOME FUND
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28,
INCREASE (DECREASE) -------------------------------
IN NET ASSETS 1995 1994
-------------- --------------
<S> <C> <C>
Operations
Net investment
income............. $ 114,223,550 $ 143,951,352
Net realized gain
(loss) on
investment
transactions....... (93,893,429) 73,862,182
Net change in
unrealized
appreciation on
investments........ (39,470,823) (137,565,425)
-------------- --------------
Net increase
(decrease) in net
assets resulting
from operations.... (19,140,702) 80,248,109
-------------- --------------
Dividends and distributions (Note 1)
Dividends to shareholders from
net investment income
Class A............ (7,117,500) (3,625,302)
Class B............ (107,101,716) (140,326,050)
Class C............ (4,334) --
-------------- --------------
(114,223,550) (143,951,352)
-------------- --------------
Distributions to
shareholders in
excess of capital
gains
Class A............ -- (132,529)
Class B............ -- (5,651,138)
-------------- --------------
-- (5,783,667)
-------------- --------------
Fund share transactions
(net of share
conversions) (Note 5)
Net proceeds from
shares
subscribed......... 79,769,541 238,679,715
Net asset value of
shares issued to
shareholders in
reinvestment of
dividends and
distributions...... 64,092,911 83,988,251
Cost of shares
reacquired......... (687,645,132) (740,509,270)
-------------- --------------
Decrease in net
assets from Fund
share
transactions....... (543,782,680) (417,841,304)
-------------- --------------
Total decrease......... (677,146,932) (487,328,214)
NET ASSETS
Beginning of year...... 2,254,227,859 2,741,556,073
-------------- --------------
End of year............ $1,577,080,927 $2,254,227,859
-------------- --------------
-------------- --------------
</TABLE>
See Notes to Financial Statements.
B-35
<PAGE>
PRUDENTIAL GOVERNMENT INCOME FUND
NOTES TO FINANCIAL STATEMENTS
Prudential Government Income Fund, formerly known as Prudential Government
Plus Fund, (the "Fund") is registered under the Investment Company Act of 1940
as a diversified, open-end management investment company. Investment operations
commenced on April 22, 1985.
The Fund's investment objective is to seek a high current return. The Fund
will seek to achieve this objective by investing primarily in U.S. Government
and agency securities and writing and purchasing put and call options and net
gains from closing purchase and sale transactions.
NOTE 1. ACCOUNTING The following is a summary
POLICIES of significant accounting poli-
cies followed by the Fund in the preparation of
its financial statements.
SECURITY VALUATION: The Fund values portfolio securities on the basis of current
market quotations provided by dealers or by a pricing service approved by the
Board of Directors, which uses information such as quotations from dealers,
market transactions in comparable securities, various relationships between
securities and calculations on yield to maturity in determining values. Options
and financial futures contracts listed on exchanges are valued at their closing
price on the applicable exchange. When market quotations are not readily
available, a security is valued at fair value as determined in good faith by or
under the direction of the Board of Directors.
Short-term securities which mature in more than 60 days are valued at current
market quotations. Short-term securities which mature in 60 days or less are
valued at amortized cost.
In connection with repurchase agreement transactions, the Fund's custodian,
or designated subcustodians as the case may be under triparty repurchase
agreements, takes possession of the underlying collateral securities, the value
of which exceeds the principal amount of the repurchase transaction, including
accrued interest. To the extent that any repurchase transaction exceeds one
business day, the value of the collateral is marked-to-market on a daily basis
to ensure the adequacy of the collateral. 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.
INTEREST RATE SWAP: An interest rate swap is an agreement between two parties in
which each party commits to make periodic interest payments to the other based
on a notional principal amount for a specified time period, E.G., an exchange of
floating rate payments for fixed rate payments. Interest rate swaps were
conceived as asset/liability management tools. Interest rate swaps only involve
the accrual and exchange of interest payments between the parties and do not
involve the exchange or payment of the contracted notional principal amount. The
Fund is exposed to credit loss in the event of non-performance by the other
party to the interest rate swap. However, the Fund does not anticipate
non-performance by any counterparty.
During the term of a swap, changes in the value of the swap are recognized as
unrealized gains or losses by ``marking-to-market'' to reflect the market value
of the swap. Interest income is accrued or charged based upon the prevailing
terms of the swap. When a swap is terminated, the Fund will record a realized
gain or loss equal to the difference, if any, between the proceeds from (or cost
of) the closing transaction and the Fund's basis in the contract. There were no
interest rate swaps outstanding as of February 28, 1995.
OPTION WRITING: The Fund may either purchase or write options in order to hedge
against adverse market movements or fluctuations in value caused by changes in
prevailing interest rates with respect to securities which the Fund currently
owns or intends to purchase. The Fund's principal reason for writing options is
to realize, through receipt of premiums, a greater current return than would be
realized on the underlying security alone. When the Fund purchases an option, it
pays a premium and an amount equal to that premium is recorded as an investment.
When the Fund writes an option, it receives a premium and an amount equal to
that premium is recorded as a liability. The investment or liability is adjusted
daily to reflect the current market value of the option. If an option expires
unexercised, the Fund realizes a gain or loss to the extent of the premium
received or paid. If an option is exercised, the premium received or paid is an
adjustment to the proceeds from the sale or the cost of the purchase in
determining whether the Fund has realized a gain or loss. The difference between
the premium and the amount received or paid on effecting a closing purchase or
sale transaction is also treated as a realized gain or loss. Gain or loss on
purchased options is included in net realized gain (loss) on investment
transactions. Gain or loss on written options is presented separately as net
realized gain (loss) on written option transactions.
The Fund, as a writer of an option, may have no control over whether the
underlying securities may be sold (called) or
B-36
<PAGE>
purchased (put). As a result, the Fund bears the market risk of an unfavorable
change in the price of the security underlying the written option. The Fund, as
purchaser of an option, bears the risk of the potential inability of the
counterparties to meet the terms of their contracts. As of February 28, 1995,
the Fund did not have any open written options.
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
sales proceeds and the lower repurchase price is recorded as interest income.
The Fund maintains a segregated account, the dollar value of which is at least
equal to its obligations, in respect of dollar rolls.
SECURITIES LENDING: The Fund may lend its U.S. Government securities to
broker-dealers or government securities dealers. The loans are secured by
collateral at least equal at all times to the market value of the securities
loaned. The Fund may bear the risk of delay in recovery of, or even loss of
rights in, the securities loaned should the borrower of the securities fail
financially. The Fund receives compensation for lending its securities in the
form of fees or it retains a portion of interest on the investment of any cash
received as collateral. The Fund also continues to receive interest on the
securities loaned and any gain or loss in the market price of the securities
loaned that may occur during the term of the loan will be for the account of the
Fund. There were no loans outstanding as of February 28, 1995.
SECURITIES TRANSACTIONS AND INVESTMENT INCOME: Securities transactions are
recorded on the trade date. Realized gains or losses on sales of securities are
calculated on the identified cost basis. Interest income is recorded on the
accrual basis. 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.
DIVIDENDS AND DISTRIBUTIONS: The Fund declares daily and pays monthly dividends
from net investment income. 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.
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 to its shareholders.
Therefore, no federal income tax provision is required.
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 up to $3 billion
and .35 of 1% of the average daily net assets of the Fund in excess of $3
billion.
The Fund has distribution agreements with Prudential Mutual Fund
Distributors, Inc. ("PMFD"), who acts as the distributor of the Class A shares
of the Fund and Prudential Securities Incorporated ("PSI"), who acts as
distributor of the Class B and Class C shares of the Fund (collectively the
"Distributors"). The Fund compensates the Distributors for distributing and
servicing the Fund's Class A, Class B and Class C shares, pursuant to plans of
distribution (the "Class A, B and C Plans") regardless of expenses actually
incurred by them. The distribution fees are accrued daily and payable monthly.
On July 19, 1994, shareholders of the Fund approved amendments to the Class A
and Class B distribution plans under which the distribution plans became
compensation plans, effective August 1, 1994. Prior thereto, the distribution
plans were reimbursement plans, under which PMFD and PSI were reimbursed for
expenses actually incurred by them up to the amount permitted under the Class A
and Class B Plans, respectively. The Fund is not obligated to pay any prior or
future excess distribution costs (costs incurred by the Distributors in excess
of distribution fees paid by the Fund or contingent deferred sales charges
received by the Distributors). The Fund began offering Class C shares on August
1, 1994.
Pursuant to the Class A Plan, the Fund compensates 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
B-37
<PAGE>
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 February
28, 1995.
Pursuant to the Class B Plan, the Fund compensates PSI for its
distribution-related expenses with respect to Class B shares at an annual rate
of up to 1% of the average daily net assets up to $3 billion, .80 of 1% of the
next $1 billion of such net assets and .50 of 1% over $4 billion of the average
daily net assets of the Class B shares. Prior to August 1, 1994, such expenses
under Class B Plan were charged at an effective rate of .90 of 1% of average
daily net assets. Beginning August 1, 1994, the effective rate was reduced to
.825 of 1% of the average daily net assets of Class B shares.
Pursuant to the Class C Plan, the Fund compensates PSI for its
distribution-related expenses with respect to Class C shares at an annual rate
of up to .825 of 1% of the average daily net assets up to $3 billion, .80 of 1%
of the next $1 billion of such net assets and .50 of 1% over $4 billion of the
average daily net assets of the Class C shares. Such expenses under Class C Plan
were charged at an effective rate of .75 of 1% of average daily net assets.
PMFD has advised the Fund that it has received approximately $196,000 in
front-end sales charges resulting from sales of Class A shares during the year
ended February 28, 1995. From these fees, PMFD paid such sales charges to
dealers which in turn paid commissions to salespersons.
PSI has advised the Fund that for the year ended February 28, 1995 it
received approximately $3,123,000 in contingent deferred sales charges imposed
upon redemptions by certain Class B and Class C shareholders.
PMFD is a wholly-owned subsidiary of PMF; PSI, PMF and PIC are indirect,
wholly-owned subsidiaries of The Prudential Insurance Company of America.
NOTE 3. OTHER Prudential Mutual Fund Ser-
TRANSACTIONS vices, Inc. ("PMFS"), a
WITH AFFILIATES wholly-owned subsidiary of
PMF, serves as the Fund's transfer agent. During
the year ended February 28, 1995, the Fund incurred fees of approximately
$2,001,000 for the services of PMFS. As of February 28, 1995, approximately
$158,000 of such fees were due to PMFS. Transfer agent fees and expenses in the
Statement of Operations also include certain out of pocket expenses paid to
non-affiliates.
NOTE 4. PORTFOLIO Purchases and sales of invest-
SECURITIES ment securities, other than
short-term investments, for the year ended
February 28, 1995, were $3,607,229,712 and $4,217,994,778, respectively.
The federal income tax cost basis of the Fund's investments, at February 28,
1995 was the same as for book purposes and, accordingly, net unrealized
depreciation for federal income tax purposes was $796,317 (gross unrealized
appreciation-$16,594,213; gross unrealized depreciation-
$17,390,530).
The Fund had a capital loss carryforward as of February 28, 1995 of
approximately $140,517,000 of which $34,965,000 expires in 1998, $41,965,000
expires in 1999 and $63,587,000 expires in 2003. Accordingly, no capital gains
distribution is expected to be paid to shareholders until net gains have been
realized in excess of such amounts.
Transactions in written options during the year ended February 28, 1995 were
as follows:
<TABLE>
<CAPTION>
NUMBER OF
CONTRACTS PREMIUMS
(000) RECEIVED
<S> <C> <C>
----------- ------------
Options written 2,601 $ 2,222,656
Options terminated in closing
purchase transactions......... (2,601) (2,222,656)
----------- ------------
Options outstanding at February
28, 1995...................... 0 $ 0
----------- ------------
----------- ------------
</TABLE>
The average monthly balance of dollar rolls outstanding during the year ended
February 28, 1995 was approximately $77,787,000. The amount of dollar rolls
outstanding at February 28, 1995 was $45,859,375, which was 2.62% of total
assets.
NOTE 5. CAPITAL The Fund offers Class A,
Class B and Class C shares. Class A shares are
sold with a front-end sales charge of up to 4.0%. Class B shares are sold with a
contingent deferred sales charge which declines from 5% to zero depending on the
period of time the shares are held. Class C shares are sold with a contingent
deferred sales charge of 1% during the first year. Commencing in February 1995,
Class B shares automatically convert to Class A shares on a quarterly basis
approximately seven years after purchase.
There are 2 billion shares of common stock, $.01 par value per share, divided
into three classes, designated Class A, B and Class C common stock, each of
which consists of 666,666,666.67 authorized shares.
B-38
<PAGE>
Transactions in shares of common stock were as follows:
<TABLE>
<CAPTION>
Class A SHARES AMOUNT
- ------- ------------ ---------------
<S> <C> <C>
Year ended February 28,
1995:
Shares sold................. 1,650,843 $ 14,143,438
Shares issued in
reinvestment of
dividends................. 517,170 4,416,369
Shares reacquired........... (3,871,087) (33,161,047)
------------ ---------------
Net decrease in shares out-
standing before
conversion................ (1,703,074) (14,601,240)
Shares sold upon conversion
from Class B.............. 97,449,952 825,401,064
------------ ---------------
Net increase in shares
outstanding............... 95,746,878 $ 810,799,824
------------ ---------------
------------ ---------------
Year ended February 28,
1994:
Shares sold................. 2,311,175 $ 21,702,798
Shares issued in
reinvestment of dividends
and distributions......... 284,558 2,664,856
Shares reacquired........... (3,453,736) (32,339,525)
------------ ---------------
Net decrease in shares
outstanding............... (858,003) $ (7,971,871)
------------ ---------------
------------ ---------------
<CAPTION>
Class B SHARES AMOUNT
- ------- ------------ ---------------
<S> <C> <C>
Year ended February 28,
1995:
Shares sold................. 7,582,662 $ 65,420,737
Shares issued in
reinvestment of
dividends................. 5,979,498 59,672,362
Shares reacquired........... (75,332,177) (654,474,203)
------------ ---------------
Net decrease in shares out-
standing before
conversion................ (61,770,017) (529,381,104)
Shares reacquired upon con-
version into Class A...... (97,449,952) (825,401,064)
------------ ---------------
Net decrease in shares
outstanding............... (159,219,969) $(1,354,782,168)
------------ ---------------
------------ ---------------
Year ended February 28,
1994:
Shares sold................. 23,072,579 $ 216,976,917
Shares issued in
reinvestment of dividends
and distributions......... 8,684,229 81,323,395
Shares reacquired........... (75,476,876) (708,169,745)
------------ ---------------
Net decrease in shares
outstanding............... (43,720,068) $ (409,869,433)
------------ ---------------
------------ ---------------
<CAPTION>
Class C
- -------
<S> <C> <C>
August 1, 1994* through
February 28, 1995:
Shares sold................. 24,418 $ 205,366
Shares issued in
reinvestment of
dividends................. 498 4,180
Shares reacquired........... (1,195) (9,882)
------------ ---------------
Net increase in shares
outstanding............... 23,721 $ 199,664
------------ ---------------
------------ ---------------
<FN>
- ---------------
* Commencement of offering of Class C shares.
</TABLE>
B-39
<PAGE>
PRUDENTIAL GOVERNMENT INCOME FUND
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
CLASS A CLASS B
------------------------------------------------ -------------------------------------------------
YEARS ENDED FEBRUARY 28/29, YEARS ENDED FEBRUARY 28/29,
------------------------------------------------ -------------------------------------------------
1995 1994 1993 1992 1991 1995 1994 1993 1992
-------- ------- ------- ------- ------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value,
beginning of
period............. $ 9.13 $ 9.40 $ 9.17 $ 9.02 $ 9.00 $ 9.13 $ 9.40 $ 9.17 $ 9.02
-------- ------- ------- ------- ------- ---------- ---------- ---------- ----------
INCOME FROM INVESTMENT
OPERATIONS
Net investment
income............. 0.59 0.61 0.66 0.68 0.69 0.53 0.53 0.58 0.60
Net realized and
unrealized gain
(loss) on
investment
transactions....... (0.54) (0.25) 0.35 0.37 0.26 (0.53) (0.25) 0.35 0.37
-------- ------- ------- ------- ------- ---------- ---------- ---------- ----------
Total from
investment
operations....... 0.05 0.36 1.01 1.05 0.95 -- 0.28 0.93 0.97
-------- ------- ------- ------- ------- ---------- ---------- ---------- ----------
LESS DISTRIBUTIONS
Dividends from net
investment
income............. (0.59) (0.61) (0.66) (0.68) (0.69) (0.53) (0.53) (0.58) (0.60)
Distributions in
excess of
accumulated
gains.............. -- (0.02) -- -- -- -- (0.02) -- --
Distributions from
paid-in capital in
excess of par...... -- -- (0.12) (0.22) (0.24) -- -- (0.12) (0.22)
-------- ------- ------- ------- ------- ---------- ---------- ---------- ----------
Total
distributions.... (0.59) (0.63) (0.78) (0.90) (0.93) (0.53) (0.55) (0.70) (0.82)
-------- ------- ------- ------- ------- ---------- ---------- ---------- ----------
Net asset value, end
of period.......... $ 8.59 $ 9.13 $ 9.40 $ 9.17 $ 9.02 $ 8.60 $ 9.13 $ 9.40 $ 9.17
-------- ------- ------- ------- ------- ---------- ---------- ---------- ----------
-------- ------- ------- ------- ------- ---------- ---------- ---------- ----------
TOTAL RETURN#:....... .83% 3.90% 11.55% 12.18% 11.21% .24% 3.03% 10.61% 11.27%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of
period (000)....... $871,145 $51,673 $61,297 $33,181 $28,971 $ 705,732 $2,202,555 $2,680,259 $2,724,428
Average net assets
(000).............. $ 95,560 $55,921 $46,812 $29,534 $23,428 $1,735,413 $2,487,990 $2,670,924 $2,903,704
Ratios to average net
assets:##
Expenses, including
distribution
fees............. 0.98% 0.84% 0.84% 0.86% 0.85% 1.66% 1.68% 1.69% 1.71%
Expenses, excluding
distribution
fees............. 0.83% 0.69% 0.69% 0.71% 0.70% 0.80% 0.69% 0.69% 0.71%
Net investment
income........... 7.45% 6.48% 7.17% 7.51% 7.76% 6.17% 5.64% 6.32% 6.66%
Portfolio turnover
rate............... 206% 80% 36% 187% 213% 206% 80% 36% 187%
<CAPTION>
CLASS C
------------
AUGUST 1,
1994+
THROUGH
FEBRUARY 28,
1991 1995
---------- ------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value,
beginning of
period............. $ 9.00 $ 8.69
---------- ------
INCOME FROM INVESTMENT
OPERATIONS
Net investment
income............. 0.62 0.31
Net realized and
unrealized gain
(loss) on
investment
transactions....... 0.26 (0.09)
---------- ------
Total from
investment
operations....... 0.88 0.22
------
----------
LESS DISTRIBUTIONS
Dividends from net
investment
income............. (0.62) (0.31)
Distributions in
excess of
accumulated
gains.............. -- --
Distributions from
paid-in capital in
excess of par...... (0.24) --
---------- ------
Total
distributions.... (0.86) (0.31)
---------- ------
Net asset value, end
of period.......... $ 9.02 $ 8.60
---------- ------
---------- ------
TOTAL RETURN#:....... 10.35% 2.75%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of
period (000)....... $3,127,587 $ 204
Average net assets
(000).............. $3,432,948 $ 111
Ratios to average net
assets:##
Expenses, including
distribution
fees............. 1.67% 1.63%*
Expenses, excluding
distribution
fees............. 0.70% 0.88%*
Net investment
income........... 6.94% 6.69%*
Portfolio turnover
rate............... 213% 206%
<FN>
- ---------------
+ Commencement of offering of Class C 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.
## Because of the events referred to in D and the timing of such, the
ratios for the Class C shares are not necessarily comparable to that
of Class A or B shares and are not necessarily indicative of future
ratios.
</TABLE>
See Notes to Financial Statements.
B-40
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Shareholders and Board of Directors
Prudential Government Income Fund Inc.
We have audited the accompanying statement of assets and liabilities of
Prudential Government Income Fund Inc. (formerly Prudential Government Plus Fund
Inc.), including the portfolio of investments, as of February 28, 1995, the
related statements of operations for the year then ended and of changes in net
assets for each of the two years in the period then ended and the financial
highlights for each of the five years in the period then ended. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned as of
February 28, 1995 by correspondence with the custodian and brokers; where
replies were not received from brokers, we performed other auditing procedures.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Prudential
Government Income Fund, Inc. as of February 28, 1995, the results of its
operations, the changes in its net assets and the financial highlights for the
respective stated periods in conformity with generally accepted accounting
principles.
Deloitte & Touche LLP
New York, New York
April 13, 1995
IMPORTANCE NOTICE FOR
CERTAIN SHAREHOLDERS
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 providing the mutual fund meets certain requirements mandated
by the respective state's taxing authorities. We are pleased to report that
48.4% of the dividends paid by Prudential Government Income Fund qualify for
such deduction.
For more detailed information regarding your state and local taxes, you
should contact your tax adviser or the state/local taxing authorities.
B-41
<PAGE>
Prudential Mutual Funds
Supplement dated August 1, 1995
The following information supplements the Statement of Additional
Information of each of the Funds listed below.
MANAGER
Prudential Mutual Fund Management, Inc. (PMF or the Manager), the Manager of
the Fund, is a subsidiary of Prudential Securities Incorporated and The
Prudential Insurance Company of America (Prudential). PMF has three wholly-owned
subsidiaries: Prudential Mutual Fund Distributors, Inc., Prudential Mutual Fund
Services, Inc. (PMFS or the Transfer Agent) and Prudential Mutual Fund
Investment Management, Inc. PMFS serves as the transfer agent for the Prudential
Mutual Funds and, in addition, provides customer service, record keeping and
management and administration services to qualified plans.
Prudential is one of the largest diversified financial services institutions
in the world and, based on total assets, the largest insurance company in North
America as of December 31, 1994. Its primary business is to offer a full range
of products and services in three areas: insurance, investments and home
ownership for individuals and families; health-care management and other benefit
programs for employees of companies and members of groups; and asset management
for institutional clients and their associates. Prudential (together with its
subsidiaries) employs nearly 100,000 persons worldwide, and maintains a sales
force of approximately 19,000 agents, 3,400 insurance brokers and 6,000
financial advisors. It insures or provides other financial services to more than
50 million people worldwide. Prudential is a major issuer of annuities,
including variable annuities. Prudential seeks to develop innovative products
and services to meet consumer needs in each of its business areas.
Investment advisory services are provided to the Fund by a unit of The
Prudential Investment Corporation (PIC or the Subadviser), a subsidiary of
Prudential.
The Subadviser maintains a credit unit which provides credit analysis and
research on both tax-exempt and taxable fixed-income securities. The portfolio
manager routinely consults with the credit unit in managing the Fund's
portfolio. The credit unit reviews on an ongoing basis issuers of tax-exempt and
taxable fixed-income obligations, including prospective purchases and portfolio
holdings of the Fund. Credit analysts have broad access to research and
financial reports, data retrieval services and industry analysts.
With respect to taxable fixed-income obligations, credit analysts review
financial statements published by corporate (and governmental) issuers to
examine income statements, balance sheets and cash flow numbers. They evaluate
this data against their expectations of sales, earnings growth and trends in
credit ratios. They study the impact of economic, regulatory and political
developments on companies and industries and look at the relative value of
companies. They are in regular communication both in person and by telephone
with company management, Wall Street analysts and rating agencies.
With respect to tax-exempt issuers, credit analysts review financial and
operating statements supplied by state and local governments and other issuers
of municipal securities to evaluate revenue projections and the financial
soundness of municipal issuers. They study the impact of economic and political
developments on state and local governments, evaluate industry sectors and meet
periodically with public officials and other representatives of state and local
governments and other tax-exempt issuers to discuss such matters as budget
projections, debt policy, the strength of the regional economy and, in the case
of revenue bonds, the demand for facilities. They also make site inspections to
review specific projects and to evaluate the progress of construction or the
operation of a facility.
Peter Allegrini oversees the municipal bond team at the Subadviser. He also
serves as the portfolio manager of the High Yield Series of Prudential Municipal
Bond Fund and the Pennsylvania Series of Prudential Municipal Series Fund. He
has been in the investment business since 1978.
From time to time, there may be media coverage of portfolio managers and
other investment professionals associated with the Manager and the Subadviser in
national and regional publications, or television and in other media.
Additionally, individual mutual fund portfolios are frequently cited in surveys
conducted by national and regional publications and media organizations such as
The Wall Street Journal, The New York Times, Barron's and USA Today.
SHAREHOLDER INVESTMENT ACCOUNT
MUTUAL FUND PROGRAMS
From time to time, the Fund (or a portfolio of the Fund, if applicable) may
be included in a mutual fund program with other Prudential Mutual Funds. Under
such a program, a group of portfolios will be selected and thereafter promoted
collectively. Typically, these programs are created with an investment theme,
e.g., to seek greater diversification, protection
<PAGE>
from interest rate movements or access to different management styles. In the
event such a program is instituted, there may be a minimum investment
requirement for the program as a whole. The Fund may waive or reduce the minimum
initial investment requirements in connection with such a program.
The mutual funds in the program may be purchased individually or as a part
of the program. Since the allocation of portfolios included in the program may
not be appropriate for all investors, investors should consult their Prudential
Securities Financial Advisor or Prudential/Pruco Securities Representative
concerning the appropriate blend of portfolios for them. If investors elect to
purchase the individual mutual funds that constitute the program in an
investment ratio different from that offered by the program, the standard
minimum investment requirements for the individual mutual funds will apply.
<PAGE>
Prudential Mutual Funds
Supplement dated September 29, 1995
The following information supplements the Statement of Additional Information of
each of the Funds listed below.
MANAGER
Prudential Mutual Fund Management, Inc. (PMF or the Manager) serves as the
manager of all of the investment companies that comprise the Prudential Mutual
Funds. As of August 31, 1995, assets of the Prudential Mutual Funds were
approximately $50 billion. The Prudential Investment Corporation (PIC) serves as
the investment adviser for each of the Funds listed below. The unit of PIC which
provides investment advisory services to the Funds is known as Prudential Mutual
Fund Investment Management.
Based on data for the year ended December 31, 1994 for the Prudential Mutual
Funds, on an average day, there are approximately $80 million in common stock
transactions, over $100 million in bond transactions and over $4.1 billion in
money market transactions. In 1994, the Prudential Mutual Funds effected more
than 57,000 trades in money market securities and held on average $21 billion of
money market securities. Based on complex-wide data for the year ended December
31, 1994, on an average day, 7,168 shareholders telephoned Prudential Mutual
Fund Services, Inc., the Transfer Agent of the Prudential Mutual Funds, on the
Prudential Mutual Funds' toll-free number. On an annual basis, that represents
approximately 1.8 million telephone calls and approximately 1.1 million fund
transactions.
PMF is a subsidiary of The Prudential Insurance Company of America
(Prudential), one of the largest diversified financial services institutions in
the world. For the year ended December 31, 1994, Prudential through its
subsidiaries provided financial services to more than 50 million people
worldwide --more than one of every five people in the United States. As of
December 31, 1994, Prudential through its subsidiaries provided automobile
insurance for more than 1.8 million cars and insured more than 1.5 million
homes. For the year ended December 31, 1994, The Prudential Bank, a subsidiary
of Prudential, served 940,000 customers in 50 states providing credit card
services and loans totaling more than $1.2 billion. Assets held by Prudential
Securities Incorporated (PSI) for its clients totaled approximately $150 billion
at December 31, 1994. During 1994, over 28,000 new customer accounts were opened
each month at PSI. The Prudential Real Estate Affiliates, the fourth largest
real estate brokerage network in the United States, has more than 34,000 brokers
and agents and more than 1,100 offices in the United States.
(over)
<PAGE>
Listed below are the names of the Prudential Mutual Funds and the dates of
the Statements of Additional Information to which this supplement relates.
<TABLE>
<CAPTION>
Name of Fund Statement Date
<S> <C>
Prudential Allocation Fund September 29, 1995
Strategy Portfolio
Balanced Portfolio
Prudential California Municipal Fund
California Income Series December 30, 1994
California Series December 30, 1994
Prudential Diversified Bond Fund, Inc. January 3, 1995
Prudential Equity Fund, Inc. February 28, 1995
Prudential Equity Income Fund December 30, 1994
Prudential Europe Growth Fund, Inc. June 30, 1995
Prudential Global Fund, Inc. January 3, 1995
Prudential Global Genesis Fund, Inc. July 31, 1995
Prudential Global Natural Resources Fund, Inc. July 31, 1995
Prudential Government Income Fund, Inc. May 1, 1995
Prudential Government Securities Trust
Short-Intermediate Term Series August 1, 1995
Prudential Growth Opportunity Fund, Inc. February 1, 1995
Prudential High Yield Fund, Inc. February 28, 1995
Prudential Intermediate Global Income Fund, Inc. March 2, 1995
Prudential Mortgage Income Fund, Inc. August 25, 1995
Prudential Multi-Sector Fund, Inc. June 30, 1995
Prudential Municipal Bond Fund June 30, 1995
Insured Series
High Yield Series
Intermediate Series
Prudential Municipal Series Fund
Arizona Series December 30, 1994
Florida Series December 30, 1994
Georgia Series December 30, 1994
Hawaii Income Series March 30, 1995
Maryland Series December 30, 1994
Massachusetts Series December 30, 1994
Michigan Series December 30, 1994
Minnesota Series December 30, 1994
New Jersey Series December 30, 1994
New York Series December 30, 1994
North Carolina Series December 30, 1994
Ohio Series December 30, 1994
Pennsylvania Series December 30, 1994
Prudential National Municipals Fund, Inc. February 28, 1995
Prudential Pacific Growth Fund, Inc. January 3, 1995
Prudential Short Term Global Income Fund, Inc.
Global Assets Portfolio January 3, 1995
Short-Term Global Income Portfolio January 3, 1995
Prudential Structured Maturity Fund, Inc. March 1, 1995
Income Portfolio
Prudential U. S. Government Fund January 3, 1995
Prudential Utility Fund, Inc. March 1, 1995
</TABLE>
<PAGE>
APPENDIX--GENERAL INVESTMENT INFORMATION
The following terms are used in mutual fund investing.
ASSET ALLOCATION
Asset allocation is a technique for reducing risk, providing balance. Asset
allocation among different types of securities within an overall investment
portfolio helps to reduce risk and to potentially provide stable returns, while
enabling investors to work toward their financial goal(s). Asset allocation is
also a strategy to gain exposure to better performing asset classes while
maintaining investment in other asset classes.
DIVERSIFICATION
Diversification is a time-honored technique for reducing risk, providing
``balance'' to an overall portfolio and potentially achieving more stable
returns. Owning a portfolio of securities mitigates the individual risks (and
returns) of any one security. Additionally, diversification among types of
securities reduces the risks and (general returns) of any one type of security.
DURATION
Debt securities have varying levels of sensitivity to interest rates. As
interest rates fluctuate, the value of a bond (or a bond portfolio) will
increase or decrease. Longer term bonds are generally more sensitive to changes
in interest rates. When interest rates fall, bond prices generally rise.
Conversely, when interest rates rise, bond prices generally fall.
Duration is an approximation of the price sensitivity of a bond (or a bond
portfolio) to interest rate changes. It measures the weighted average maturity
of a bond's (or a bond portfolio's) cash flows, i.e., principal and interest
rate payments. Duration is expressed as a measure of time in years--the longer
the duration of a bond (or a bond portfolio), the greater the impact of interest
rate changes on the bond's (or the bond portfolio's) price. Duration differs
from effective maturity in that duration takes into account call provisions,
coupon rates and other factors. Duration measures interest rate risk only and
not other risks, such as credit risk and, in the case of non-U.S. dollar
denominated securities, currency risk. Effective maturity measures the final
maturity dates of a bond (or a bond portfolio).
MARKET TIMING
Market timing--buying securities when prices are low and selling them when
prices are relatively higher--may not work for many investors because it is
impossible to predict with certainty how the price of a security will fluctuate.
However, owning a security for a long period of time may help investors offset
short-term price volatility and realize positive returns.
POWER OF COMPOUNDING
Over time, the compounding of returns can significantly impact investment
returns. Compounding is the effect of continuous investment on long-term
investment results, by which the proceeds of capital appreciation (and income
distributions, if elected) are reinvested to contribute to the overall growth of
assets. The long-term investment results of compounding may be greater than that
of an equivalent initial investment in which the proceeds of capital
appreciation and income distributions are taken in cash.
<PAGE>
APPENDIX--PORTFOLIO MANAGERS
The following information supplements only the Statement of Additional
Information of the captioned Fund.
PRUDENTIAL HIGH YIELD FUND, INC.
According to data provided by Lipper Analytical Services, Inc., Prudential
High Yield Fund, Inc. is among the oldest and largest U.S. mutual funds in the
high current yield category of taxable fixed-income funds. Lars Berkman has
served as the Fund's portfolio manager since 1991. In managing the Fund, he
seeks to identify well priced, high yield securities consistent with the Fund's
investment objective. Mr. Berkman is assisted by a team of credit analysts who
analyze corporate cash flows, sales, earnings and management trends.
PRUDENTIAL DIVERSIFIED BOND FUND, INC.
PRUDENTIAL GOVERNMENT INCOME FUND, INC.
Barbara Kenworthy serves as the portfolio manager of Prudential Diversified
Bond Fund, Inc. and Prudential Government Income Fund, Inc. and has 20 years of
investment management experience in both U.S. and foreign securities and
investment grade and high yield quality bonds. Ms. Kenworthy actively manages
each Fund's portfolio according to the investment adviser's interest rate
outlook. Consistent with each Fund's investment objective and policies, she
will, at times, invest in different sectors of the fixed-income markets seeking
price discrepancies and more favorable interest rates. The investment adviser
conducts extensive analysis of U.S. and overseas markets in an attempt to
identify trends in interest rates, supply and demand and economic growth. The
portfolio manager then selects the sectors, maturities and individual bonds she
believes provide the best value under those conditions. The portfolio manager is
assisted by two credit analysis teams, one that specializes in investment grade
bonds and one that specializes in high yield bonds.
PRUDENTIAL MUNICIPAL SERIES FUND
(ARIZONA SERIES) (OHIO SERIES) AND (HAWAII INCOME SERIES)
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
(CALIFORNIA SERIES) AND (CALIFORNIA INCOME SERIES)
Christian Smith serves as the portfolio manager of the Arizona Series, Ohio
Series and Hawaii Income Series of Prudential Municipal Series Fund and the
California Series and California Income Series of Prudential California
Municipal Fund. Consistent with each Series' investment objective and policies,
Mr. Smith seeks to invest in bonds with attractive yields and good relative
value in the municipal market. He makes use of Prudential's quantitative and
market analysis tools to structure the portfolios and seeks to achieve an
allocation among different sectors, coupons and maturities to achieve each
Series' investment goals. The portfolio manager also seeks bonds with a high
level of call protection.
<PAGE>
APPENDIX--HISTORICAL PERFORMANCE DATA
The historical performance data contained in this Appendix relies on data
obtained from statistical services, reports and other services believed by the
Manager to be reliable. The information has not been independently verified by
the Manager.
This chart shows the long-term performance of various asset classes and the rate
of inflation.
EACH INVESTMENT PROVIDES A DIFFERENT OPPORTUNITY
(Value of $1 invested on 12/31/25)
[Line Graph]
Source: Stocks, Bonds, Bills, and Inflation 1995 Yearbook, Ibbotson Associates,
Chicago (annually updates work by Roger G. Ibbotson and Rex A. Sinquefield).
Used with permission. All rights reserved. This chart is for illustrative
purposes only and is not indicative of the past, present, or future performance
of any asset class or any Prudential Mutual Fund.
Generally, stock returns are attributable to capital appreciation and the
reinvestment of distributions. Bond returns are attributable mainly to the
reinvestment of distributions. Also, stock prices are usually more volatile
than bond prices over the long-term.
Small stock returns for 1926-1989 are those of stocks comprising the 5th
quintile of the New York Stock Exchange. Thereafter, returns are those of the
Dimensional Fund Advisors (DFA) Small Company Fund. Common stock returns are
based on the S&P Composite Index, a market-weighted, unmanaged index of 500
stocks (currently) in a variety of industries. It is often used as a broad
measure of stock market performance.
Long-term government bond returns are represented by a portfolio that contains
only one bond with a maturity of roughly 20 years. At the beginning of each
year a new bond with a then-current coupon replaces the old bond. Treasury bill
returns are for a one-month bill. Treasuries are guaranteed by the government
as to the timely payment of principal and interest; equities are not. Inflation
is measured by the consumer price index (CPI).
IMPACT OF INFLATION. The "real" rate of investment return is that which exceeds
the rate of inflation, the percentage change in the value of consumer goods and
the general cost of living. A common goal of long-term investors is to outpace
the erosive impact of inflation on investment returns.
<PAGE>
Set forth below is historical performance data relating to various sectors
of the fixed-income securities markets. The chart shows the historical total
returns of U.S. Treasury bonds, U.S. mortgage securities, U.S. corporate bonds,
U.S. high yield bonds and world government bonds on an annual basis from 1987 to
May 1995. The total returns of the indices include accrued interest, plus the
price changes (gains or losses) of the underlying securities during the period
mentioned. The data is provided to illustrate the varying historical total
returns and investors should not consider this performance data as an indication
of the future performance of the Fund or of any sector in which the Fund
invests.
All information relies on data obtained from statistical services, reports
and other services believed by the Manager to be reliable. Such information has
not been verified. The figures do not reflect the operating expenses and fees
of a mutual fund. See "Fund Expenses" in the prospectus. The net effect of the
deduction of the operating expenses of a mutual fund on these historical total
returns, including the compounded effect over time, could be substantial.
HISTORICAL TOTAL RETURNS OF DIFFERENT BOND MARKET SECTORS
<TABLE>
<CAPTION>
YTD
'87 '88 '89 '90 '91 '92 '93 '94 5/95
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. GOVERNMENT TREASURY BONDS(1) 2.0% 7.0% 14.4% 8.5% 15.3% 7.2% 10.7% (3.4)% 10.3%
- --------------------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT MORTGAGE SECURITIES(2) 4.3% 8.7% 15.4% 10.7% 15.7% 7.0% 6.8% (1.6)% 10.1%
- --------------------------------------------------------------------------------------------------------------------------------
U.S. INVESTMENT GRADE
CORPORATE BONDS(3) 2.6% 9.2% 14.1% 7.1% 18.5% 8.7% 12.2% (3.9)% 12.8%
- --------------------------------------------------------------------------------------------------------------------------------
U.S. HIGH YIELD CORPORATE BONDS(4) 5.0% 12.5% 0.8% (9.6)% 46.2% 15.8% 17.1% (1.0)% 11.7%
- --------------------------------------------------------------------------------------------------------------------------------
WORLD GOVERNMENT BONDS(5) 35.2% 2.3% (3.4)% 15.3% 16.2% 4.8% 15.1% 6.0% 19.4%
- --------------------------------------------------------------------------------------------------------------------------------
DIFFERENCE BETWEEN HIGHEST
AND LOWEST RETURN PERCENT 33.2 10.2 18.8 24.9 30.9 11.0 10.3 9.9 9.3
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) LEHMAN BROTHERS TREASURY BOND INDEX is an unmanaged index made up of over
150 public issues of the U.S. Treasury having maturities of at least one year.
(2) LEHMAN BROTHERS MORTGAGE-BACKED SECURITIES INDEX is an unmanaged index that
includes over 600 15- and 30-year fixed-rate mortgage-backed securities of the
Government National Mortgage Association (GNMA), Federal National Mortgage
Association (FNMA), and the Federal Home Loan Mortgage Corporation (FHLMC).
(3) LEHMAN BROTHERS CORPORATE BOND INDEX includes over 3,000 public fixed-rate,
nonconvertible investment-grade bonds. All bonds are U.S. dollar-denominated
issues and include debt issued or guaranteed by foreign sovereign governments,
municipalities, governmental agencies or international agencies. All bonds in
the index have maturities of at least one year.
(4) LEHMAN BROTHERS HIGH YIELD BOND INDEX is an unmanaged index comprising over
750 public, fixed-rate, nonconvertible bonds that are rated Ba1 or lower by
Moody's Investors Service (or rated BB+ or lower by Standard & Poor's or Fitch
Investors Service). All bonds in the index have maturities of at least one
year.
(5) SALOMON BROTHERS WORLD GOVERNMENT INDEX (NON U.S.) includes over 800 bonds
issued by various foreign governments or agencies, excluding those in the U.S.,
but including those in Japan, Germany, France, the U.K., Canada, Italy,
Australia, Belgium, Denmark, the Netherlands, Spain, Sweden, and Austria. All
bonds in the index have maturities of at least one year.
<PAGE>
This chart below shows the historical volatility of general interest rates as
measured by the long U.S. Treasury Bond.
LONG U.S. TREASURY BOND YIELD IN PERCENT (1926-1994)
[Line Chart]
- ---------------
Source: Stocks, Bonds, Bills, and Inflation 1995 Yearbook, Ibbotson Associates,
Chicago (annually updates work by Roger G. Ibbotson and Rex A. Sinquefield).
Used with permission. All rights reserved. The chart illustrates the
historical yield of the long-term U.S. Treasury Bond from 1926-1994. Yields
represent that of an annually renewed one-bond portfolio with a remaining
maturity of approximately 20 years. This chart is for illustrative purposes and
should not be construed to represent the yields of any Prudential Mutual Fund.
<PAGE>
Listed below are the names of the Prudential Mutual Funds and the dates of
the Statements of Additional Information to which this supplement relates.
<TABLE>
<S> <C>
Name of Fund Statement Date
Prudential California Municipal Fund
California Income Series December 30, 1994
California Series December 30, 1994
Prudential Diversified Bond Fund, Inc. January 3, 1995
(as supplemented on June 20, 1995)
Prudential GNMA Fund, Inc. March 2, 1995
Prudential Government Income Fund, Inc. May 1, 1995
Prudential High Yield Fund, Inc. February 28, 1995
Prudential Intermediate Global Income Fund, Inc. March 2, 1995
Prudential Municipal Bond Fund June 30, 1995
Insured Series
High Yield Series
Intermediate Series
Prudential Municipal Series Fund
Arizona Series December 30, 1994
Florida Series December 30, 1994
Georgia Series December 30, 1994
Hawaii Income Series December 30, 1994
Maryland Series December 30, 1994
Massachusetts Series December 30, 1994
Michigan Series December 30, 1994
Minnesota Series December 30, 1994
New Jersey Series December 30, 1994
New York Series December 30, 1994
North Carolina Series December 30, 1994
Ohio Series December 30, 1994
Pennsylvania Series December 30, 1994
Prudential National Municipals Fund, Inc. February 28, 1995
Prudential Short Term Global Income Fund, Inc.
Global Assets Portfolio January 3, 1995
Short-Term Global Income Portfolio January 3, 1995
Prudential Structured Maturity Fund, Inc. March 1, 1995
Income Portfolio
Prudential U. S. Government Fund January 3, 1995
</TABLE>
<PAGE>
PART C
OTHER INFORMATION
ITEM 15. INDEMNIFICATION.
As permitted by Section 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 each Distribution Agreement (Exhibit 6 to
the Registration Statement), each 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.
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 6(a) to the Registration
Statement) and Section 4 of the Subadvisory Agreement (Exhibit 6(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 each 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 Section 17(h) and 17(i) of such Act remain
in effect and are consistently applied.
ITEM 16. EXHIBITS.
1. (a) Articles of Incorporation of Registrant, incorporated by reference to
Exhibit No. 1(a) to Registration Statement on Form N-1 (File No. 2-82976).
(b) Articles of Amendment filed January 3, 1985 with the State Department of
Assessments and Taxation of Maryland, incorporated by reference to Exhibit
No. 1(b) to Post-Effective Amendment No. 2 to Registration Statement on Form
N-1A (File No. 2-82976).
(c) Amendment to Articles of Incorporation of Registrant filed March 7, 1986
with the State Department of Assessments and Taxation of Maryland,
incorporated by reference to Exhibit No. 1(c) to Post-Effective Amendment
No. 4 to Registration Statement on Form N-1A (File No. 2-82976).
(d) Amendments to Articles of Incorporation of the Registrant filed on
January 17, 1990, incorporated by reference to Exhibit 1(d) to
Post-Effective Amendment No. 10 to Registration Statement on Form N-1A (File
No. 2-82976).
(e) Amended Articles of Incorporation of the Registrant filed on September
8, 1994, incorporated by reference to Exhibit 1(e) to Post-Effective
Amendment No. 18 to Registration Statement on Form N-1A (File No. 2-82976)
filed via EDGAR.
C-1
<PAGE>
(f) Form of Restated Articles of Incorporation incorporated by reference to
Exhibit 1(f) to Post-Effective Amendment No. 18 to Registration Statement on
Form N-1A (File No. 2-82976) filed via EDGAR.
2. Amended and Restated By-laws of the Registrant, incorporated by reference to
Exhibit 2 to Post-Effective Amendment No. 15 to Registration Statement on
Form N-1A (File No. 2-82976) filed via EDGAR.
3. Not applicable.
4. Plan of Reorganization, filed herewith as Appendix A to the Prospectus and
Proxy Statement.*
5. Instruments defining rights of holders of securities being offered,
incorporated by reference to Exhibit 4 to Post-Effective Amendment No. 15 to
Registration Statement on Form N-1A (File No. 2-82976) filed via EDGAR.
6. (a) Management Agreement between the Registrant and Prudential Mutual Fund
Management, Inc, incorporated by reference to Exhibit No. 5(b) to
Post-Effective Amendment No. 6 to Registration Statement on Form N-1A (File
No. 2-82976).
(b) Subadvisory Agreement between Prudential Mutual Fund Management, Inc.
and The Prudential Investment Corporation, incorporated by reference to
Exhibit No. 5(b) to Post-Effective Amendment No. 6 to Registration Statement
on Form N-1A (File No. 2-82976).
7. (a) Distribution Agreement with respect to Class A shares between Registrant
and Prudential Mutual Fund Distributors, Inc. dated April 13, 1995
incorporated by reference to Exhibit 6(a) to Post-Effective Amendment No. 18
to Registration Statement on Form N-1A (File No. 2-82976) filed via EDGAR.
(b) Distribution Agreement with respect to Class B shares between Registrant
and Prudential Securities Incorporated dated April 13, 1995 incorporated by
reference to Exhibit 6(b) to Post-Effective Amendment No. 18 to Registration
Statement on Form N-1A (File No. 2-82976) filed via EDGAR.
(c) Distribution Agreement with respect to Class C shares between Registrant
and Prudential Securities Incorporated dated April 13, 1995 incorporated by
reference to Exhibit 6(c) to Post-Effective Amendment No. 18 to Registration
Statement on Form N-1A (File No. 2-82976) filed via EDGAR.
(d) Dealer Agreement between Prudential-Bache Securities Inc. and dealer or
dealers to be determined, incorporated by reference to Exhibit No. 6(b) to
Post-Effective Amendment No. 2 to Registration Statement on Form N-1A (File
No. 2-82976).
8. Not applicable.
9. (a) Revised Custodian Agreement between the Registrant and State Street Bank
and Trust Company, incorporated by reference to Exhibit No. 8(d) to
Post-Effective Amendment No. 11 to Registration Statement on Form N-1A (File
No. 2-82976).
(b) Special Custody Agreement among the Registrant, State Street Bank and
Trust Company, and Goldman, Sachs & Co., incorporated by reference to
Exhibit No. 8(b) to Post-Effective Amendment No. 2 to Registration Statement
on Form N-1A (File No. 2-82976).
(c) Customer Agreement between the Registrant and Goldman, Sachs & Co.,
incorporated by reference to Exhibit No. 8(c) to Post-Effective Amendment
No. 2 to the Registration Statement on Form N-1A (File No. 2-82976).
(d) Form of Amendment to the Custodian Agreement between Registrant and
State Street Bank.*
10. (a) Distribution and Service Plan for Class A shares dated August 1, 1994
incorporated by reference to Exhibit 15(a) to Post-Effective Amendment No.
18 to Registration Statement on Form N-1A (File No. 2-82976) filed via
EDGAR.
(b) Distribution and Service Plan for Class B shares dated August 1, 1994
incorporated by reference to Exhibit 15(b) to Post-Effective Amendment No.
18 to Registration Statement on Form N-1A (File No. 2-82976) filed via
EDGAR.
(c) Distribution and Service Plan for Class C shares dated August 1, 1994
incorporated by reference to Exhibit 15(c) to Post-Effective Amendment No.
18 to Registration Statement on Form N-1A (File No. 2-82976) filed via
EDGAR.
11. Opinion and Consent of Counsel.*
12. Tax Opinion of Counsel.*
C-2
<PAGE>
13. (a) Transfer Agency Agreement between the Registrant and Prudential Mutual
Fund Services, Inc., incorporated by reference to Exhibit No. 9 to
Post-Effective Amendment No. 6 to Registration Statement on Form N-1A (File
No. 2-82976).
(b) Purchase Agreement, incorporated by reference to Exhibit No. 13 to
Post-Effective Amendment No. 2 to Registration Statement on Form N-1A (File
No. 2-82976).
14. Consent of Independent Accountants.*
15. Not applicable.
16. Not applicable.
17. (a) Proxy.*
(b) Proxy insert card.*
(c) Letter to shareholders.*
(d) Copy of Registrant's declaration pursuant to Rule 24f-2 under the 1940
Act.*
(e) Prospectus of Registrant dated May 1, 1995, as supplemented.*
(f) Prospectus of U.S. Government Fund dated January 3, 1995, as
supplemented.*
(g) Annual Report to Shareholders of the Registrant for the fiscal year
ended February 28, 1995.*
(h) Annual Report to Shareholders of Prudential U.S. Government Fund for the
fiscal year ended October 31, 1994.*
(i) Semi-Annual Report to Shareholders of the Registrant for the six months
ended August 31, 1995.**
(j) Semi-Annual Report to Shareholders of Prudential U.S. Government Fund
for the six months ended April 30, 1995, filed herewith as Appendix C to the
Prospectus and Proxy Statement.*
- ------------------------
*Filed herewith.
**To be filed.
ITEM 17. UNDERTAKINGS.
(1) The undersigned registrant agrees that prior to any public reoffering of
the securities registered through the use of a prospectus which is a part of
this registration statement by any person or party who is deemed to be an
underwriter within the meaning of Rule 145(c) of the Securities Act, the
reoffering prospectus will contain the information called for by the applicable
registration form for reofferings by persons who may be deemed underwriters, in
addition to the information called for by the other items of the applicable
form.
(2) The undersigned registrant agrees that every prospectus that is filed
under paragraph (1) above will be filed as a part of an amendment to the
registration statement and will not be used until the amendment is effective,
and that, in determining any liability under the 1933 Act, each post-effective
amendment shall be deemed to be a new registration statement for the securities
offered therein, and the offering of the securities at that time shall be deemed
to be the initial bona fide offering of them.
C-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed on behalf of the Registrant by the
undersigned, thereunto duly authorized, in the City of New York, and State of
New York, on the 20th day of October, 1995.
PRUDENTIAL GOVERNMENT INCOME FUND, INC.
By: /s/ Richard A. Redeker
------------------------------------------------------
RICHARD A. REDEKER, PRESIDENT
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ ---------------------------------------- ------------------
<S> <C> <C>
/s/ Edward D. Beach Director October 20, 1995
- ------------------------------
EDWARD D. BEACH
/s/ Delayne D. Gold Director October 20, 1995
- ------------------------------
DELAYNE D. GOLD
/s/ Harry A. Jacobs, Jr. Director October 20, 1995
- ------------------------------
HARRY A. JACOBS, JR.
/s/ Thomas T. Mooney Director October 20, 1995
- ------------------------------
THOMAS T. MOONEY
/s/ Thomas H. O'Brien Director October 20, 1995
- ------------------------------
THOMAS H. O'BRIEN
/s/ Thomas A. Owens, Jr. Director October 20, 1995
- ------------------------------
THOMAS A. OWENS, JR.
/s/ Richard A. Redeker President and Director October 20, 1995
- ------------------------------
RICHARD A. REDEKER
/s/ Stanley E. Shirk Director October 20, 1995
- ------------------------------
STANLEY E. SHIRK
/s/ Eugene S. Stark Treasurer and Principal Financial and October 20, 1995
- ------------------------------ Accounting Officer
EUGENE S. STARK
</TABLE>
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBITS PAGE
- ----------- ---------
<C> <S> <C>
1. (a) Articles of Incorporation of Registrant, incorporated by reference to Exhibit No. 1(a) to
Registration Statement on Form N-1 (File No. 2-82976).
(b) Articles of Amendment filed January 3, 1985 with the State Department of Assessments and Taxation
of Maryland, incorporated by reference to Exhibit No. 1(b) to Post-Effective Amendment No. 2 to
Registration Statement on Form N-1A (File No. 2-82976).
(c) Amendment to Articles of Incorporation of Registrant filed March 7, 1986 with the State Department
of Assessments and Taxation of Maryland, incorporated by reference to Exhibit No. 1(c) to
Post-Effective Amendment No. 4 to Registration Statement on Form N-1A (File No. 2-82976).
(d) Amendments to Articles of Incorporation of the Registrant filed on January 17, 1990, incorporated
by reference to Exhibit 1(d) to Post-Effective Amendment No. 10 to Registration Statement on Form N-1A
(File No. 2-82976).
(e) Amended Articles of Incorporation of the Registrant filed on September 8, 1994, incorporated by
reference to Exhibit 1(e) to Post-Effective Amendment No. 18 to Registration Statement on Form N-1A
(File No. 2-82976) filed via EDGAR.
(f) Form of Restated Articles of Incorporation incorporated by reference to Exhibit 1(f) to
Post-Effective Amendment No. 18 to Registration Statement on Form N-1A (File No. 2-82976) filed via
EDGAR.
2. Amended and Restated By-laws of the Registrant, incorporated by reference to Exhibit 2 to
Post-Effective Amendment No. 15 to Registration Statement on Form N-1A (File No. 2-82976) filed via
EDGAR.
3. Not applicable.
4. Plan of Reorganization, filed herewith as Appendix A to the Prospectus and Proxy Statement.*
5. Instruments defining rights of holders of securities being offered, incorporated by reference to
Exhibit 4 to Post-Effective Amendment No. 15 to Registration Statement on Form N-1A (File No. 2-82976)
filed via EDGAR.
6. (a) Management Agreement between the Registrant and Prudential Mutual Fund Management, Inc,
incorporated by reference to Exhibit No. 5(b) to Post-Effective Amendment No. 6 to Registration
Statement on Form N-1A (File No. 2-82976).
(b) Subadvisory Agreement between Prudential Mutual Fund Management, Inc. and The Prudential Investment
Corporation, incorporated by reference to Exhibit No. 5(b) to Post-Effective Amendment No. 6 to
Registration Statement on Form N-1A (File No. 2-82976).
7. (a) Distribution Agreement with respect to Class A shares between Registrant and Prudential Mutual Fund
Distributors, Inc. dated April 13, 1995 incorporated by reference to Exhibit 6(a) to Post-Effective
Amendment No. 18 to Registration Statement on Form N-1A (File No. 2-82976) filed via EDGAR.
(b) Distribution Agreement with respect to Class B shares between Registrant and Prudential Securities
Incorporated dated April 13, 1995 incorporated by reference to Exhibit 6(b) to Post-Effective Amendment
No. 18 to Registration Statement on Form N-1A (File No. 2-82976) filed via EDGAR.
(c) Distribution Agreement with respect to Class C shares between Registrant and Prudential Securities
Incorporated dated April 13, 1995 incorporated by reference to Exhibit 6(c) to Post-Effective Amendment
No. 18 to Registration Statement on Form N-1A (File No. 2-82976) filed via EDGAR.
(d) Dealer Agreement between Prudential-Bache Securities Inc. and dealer or dealers to be determined,
incorporated by reference to Exhibit No. 6(b) to Post-Effective Amendment No. 2 to Registration
Statement on Form N-1A (File No. 2-82976).
8. Not applicable.
9. (a) Revised Custodian Agreement between the Registrant and State Street Bank and Trust Company,
incorporated by reference to Exhibit No. 8(d) to Post-Effective Amendment No. 11 to Registration
Statement on Form N-1A (File No. 2-82976).
(b) Special Custody Agreement among the Registrant, State Street Bank and Trust Company, and Goldman,
Sachs & Co., incorporated by reference to Exhibit No. 8(b) to Post-Effective Amendment No. 2 to
Registration Statement on Form N-1A (File No. 2-82976).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBITS PAGE
- ----------- ---------
<C> <S> <C>
(c) Customer Agreement between the Registrant and Goldman, Sachs & Co., incorporated by reference to
Exhibit No. 8(c) to Post-Effective Amendment No. 2 to the Registration Statement on Form N-1A (File No.
2-82976).
(d) Form of Amendment to the Custodian Agreement between Registrant and State Street Bank.*
10. (a) Distribution and Service Plan for Class A shares dated August 1, 1994 incorporated by reference to
Exhibit 15(a) to Post-Effective Amendment No. 18 to Registration Statement on Form N-1A (File No.
2-82976) filed via EDGAR.
(b) Distribution and Service Plan for Class B shares dated August 1, 1994 incorporated by reference to
Exhibit 15(b) to Post-Effective Amendment No. 18 to Registration Statement on Form N-1A (File No.
2-82976) filed via EDGAR.
(c) Distribution and Service Plan for Class C shares dated August 1, 1994 incorporated by reference to
Exhibit 15(c) to Post-Effective Amendment No. 18 to Registration Statement on Form N-1A (File No.
2-82976) filed via EDGAR.
11. Opinion and Consent of Counsel.*
12. Tax Opinion of Counsel.*
13. Transfer Agency Agreement between the Registrant and Prudential Mutual Fund Services, Inc.,
incorporated by reference to Exhibit No. 9 to Post-Effective Amendment No. 6 to Registration Statement
on Form N-1A (File No. 2-82976).
14. Consent of Independent Accountants.*
15. Not applicable.
16. Not applicable.
17. (a) Proxy.*
(b) Proxy insert card.*
(c) Letter to shareholders.*
(d) Copy of Registrant's declaration pursuant to Rule 24f-2 under the 1940 Act.*
(e) Prospectus of Registrant dated May 1, 1995, as supplemented.*
(f) Prospectus of U.S. Government Fund dated January 3, 1995, as supplemented.*
(g) Annual Report to Shareholders of the Registrant for the fiscal year ended February 28, 1995.*
(h) Annual Report to Shareholders of Prudential U.S. Government Fund for the fiscal ended October 31,
1994.*
(i) Semi-Annual Report to Shareholders of the Registrant for the six months ended August 31, 1995.**
(j) Semi-Annual Report to Shareholders of Prudential U.S. Government Fund for the six months ended
April 30, 1995, filed herewith as Appendix C to the Prospectus and Proxy Statement.*
<FN>
- ------------------------
*Filed herewith.
**To be filed.
</TABLE>
<PAGE>
EXHIBIT 9(D)
FORM OF
AMENDMENT TO CUSTODIAN CONTRACT
Agreement made by and between State Street Bank and Trust Company (the
"Custodian") and (the "Fund").
WHEREAS, the Custodian and the Fund are parties to a custodian contract
dated (the "Custodian Contract") governing the terms and conditions
under which the Custodian maintains custody of the securities and other assets
of the Fund; and
WHEREAS, the Custodian and the Fund desire to amend the terms and
conditions under which the Custodian maintains the Fund's securities and other
non-cash property in the custody of certain foreign sub-custodians in conformity
with the requirements of Rule 17f-5 under the Investment Company Act of 1940, as
amended;
NOW THEREFORE, in consideration of the premises and covenants contained
herein, the Custodian and the Fund hereby amend the Custodian Contract by the
addition of the following terms and provisions;
1. Notwithstanding any provisions to the contrary set forth in the
Custodian Contract, the Custodian may hold securities and other non-cash
property for all of its customers, including the Fund, with a foreign
sub-custodian in a single account that is identified as belonging to the
Custodian for the benefit of its customers, provided however, that (i) the
records of the Custodian with respect to securities and other non-cash property
of the Fund which are maintained in such account shall identify by book-entry
those securities and other non-cash property belonging to the Fund and (ii) the
Custodian shall require that securities and other non-cash property so held by
the foreign sub-custodian be held separately from any assets of the foreign
sub-custodian or of others.
2. Except as specifically superseded or modified herein, the terms
and provisions of the Custodian Contract shall continue to apply with full force
and effect.
IN WITNESS WHEREOF, each of the parties has caused this instrument to be
executed as a sealed instrument in its name and behalf by its duly authorized
representative this day of , 1995.
By: __________________________________
Title: _______________________________
STATE STREET BANK AND TRUST COMPANY
By: __________________________________
Title: _______________________________
<PAGE>
SHEREFF, FRIEDMAN, HOFFMAN & GOODMAN, LLP
919 Third Avenue
New York, New York 10022-9998
October 20, 1995
Prudential Government Income Fund, Inc.
One Seaport Plaza
New York, New York 10292
Ladies and Gentlemen:
We have acted as counsel to Prudential Government Income Fund, Inc. (the
"Fund") in connection with the proposed reorganization (the "Reorganization") of
the Prudential U.S. Government Fund ("U.S. Government Fund"). Pursuant to the
proposed Reorganization, substantially all of the assets and liabilities of
U.S. Government Fund will be transferred to the Fund in exchange for shares
of the Fund.
The shares of the Fund being issued in connection with the Reorganization
are being registered with the Securities and Exchange Commission pursuant to a
registration statement on Form N-14 (the "Registration Statement").
In connection with the foregoing, we have examined, among other things, the
Articles of Incorporation, as amended, and By-Laws of the Fund; the draft of the
Prospectus/Proxy Statement that is contained in the Registration Statement; and
such other records and documents as we have deemed necessary in order to enable
us to express the opinion set forth below. In our examination, we have assumed
the genuineness of all signatures, the authority of all signatories other than
on behalf of the Fund, the authenticity of all documents submitted to us as
originals and the conformity to original documents of all documents submitted to
us as certified or photostatic copies.
Subject to the effectiveness of the Registration Statement and compliance
with the applicable provisions of the Articles of Incorporation and By-Laws of
the Fund as well as applicable state securities laws, and based on and subject
to the foregoing examination and assumptions and assuming that the sale and
issuance thereof is made in the manner contemplated in the Prospectus/Proxy
Statement contained in the Registration Statement, it is
<PAGE>
Prudential Government Income Fund, Inc.
October 20, 1995
Page 2
our opinion that upon payment of a consideration therefor not less than the
greater of net asset value or par value per share, the shares of the Fund which
are being registered in the Registration Statement and will be issued to U.S.
Government Fund in the Reorganization, will be, when sold, legally issued, fully
paid and non-assessable.
We are members of the Bar of the State of New York and do not hold
ourselves out as being conversant with the laws of any jurisdiction other than
those of the United States of America and the State of New York. We note that
we are not licensed to practice law in the State of Maryland, and to the extent
that any opinion herein involves the law of Maryland, such opinion should be
understood to be based solely upon our review of the documents referred to
above, the published statutes of that State and, where applicable, published
cases, rules or regulations of regulatory bodies of that State.
We hereby consent to the filing of this opinion with the Securities and
Exchange Commission as part of the Registration Statement and with any state
securities commission where such filing is required.
Very truly yours,
/s/ Shereff, Friedman, Hoffman & Goodman, LLP
---------------------------------------------
Shereff, Friedman, Hoffman & Goodman, LLP
SFHG:JHG:MKN:KLJ:jmr
<PAGE>
SHEREFF, FRIEDMAN, HOFFMAN & GOODMAN, LLP
919 Third Avenue
New York, New York 10022-9998
October 20, 1995
Prudential U.S. Government Fund
199 Water Street
New York, New York 10292
Prudential Government Income Fund, Inc.
199 Water Street
New York, New York 10292
Dear Sirs:
We are acting as counsel to Prudential U.S. Government Fund, a
Massachusetts business trust ("U.S. Government Fund"), and Prudential Government
Income Fund, Inc. a Maryland corporation ("Government Income Fund"), in
connection with the proposed transfer of all of the assets of U.S. Government
Fund to Government Income Fund and the assumption by Government Income Fund of
U.S. Government Fund's liabilities, if any, solely in exchange for shares of
Government Income Fund (the "Shares") pursuant to an Agreement and Plan of
Reorganization and Liquidation (the "Agreement"). The transactions provided for
in the Agreement are sometimes referred to herein as the "Reorganization."
In connection with rendering the opinions expressed herein, we have
examined Government Income Fund's Registration Statement on Form N-14 (the
"Registration Statement") relating to the Shares of Government Income Fund to be
offered in exchange for the assets of U.S. Government Fund, and containing the
prospectus and proxy statement relating to the transaction (collectively, the
"Prospectus"), to be filed with the Securities and Exchange Commission (the
"Commission") pursuant to the provisions of the Securities Act of 1933, as
amended (the "Securities Act"), and the Investment Company Act of 1940, as
amended, and the rules and regulations of the Commission thereunder. In
addition, we have examined originals or copies, certified or otherwise
identified to our satisfaction, of such other documents, records and other
instruments as we have deemed necessary or appropriate for the purpose of
rendering this opinion, including the form of the Agreement included as
Appendix A to the Prospectus.
<PAGE>
Prudential U.S. Government Fund
Prudential Government Income Fund, Inc.
October 20, 1995
Page 2
In our examination of the foregoing documents we have assumed the
genuineness of all signatures, the authority of each signatory, the due
execution and delivery of all documents by all parties, the authenticity of all
agreements, documents, certificates and instruments submitted to us as
originals, the conformity of the Agreement as executed and delivered by the
parties with the form of the Agreement contained in the Prospectus, and the
conformity with originals of all agreements, documents, certificates and
instruments submitted to us as copies.
In rendering the opinions expressed herein, we have assumed that the
transactions contemplated by the Agreement will be consummated in accordance
therewith and as described in the Prospectus. As to other questions of fact
material to this opinion, we have assumed, with your approval and without
independent investigation or verification, that the following facts will be
accurate and complete as of the consummation of the Reorganization (the "Closing
Date").
1. The fair market value of the Shares to be received by each U.S.
Government Fund shareholder will be equal to the fair market value of the U.S.
Government Fund shares surrendered in exchange therefor upon the liquidation of
U.S. Government Fund.
2. There will be no plan or intention by any shareholder of U.S.
Government Fund who owns 5 percent or more of the outstanding shares of U.S.
Government Fund, and to the best of the knowledge of management of U.S.
Government Fund, there will be no plan or intention on the part of the remaining
shareholders of U.S. Government Fund, to sell, exchange, or otherwise dispose of
a number of Shares received in the Reorganization that would reduce U.S.
Government Fund shareholders' ownership of Shares of Government Income Fund to a
number of Shares having a value, as of the Closing Date, of less than 50 percent
of the value of all formerly outstanding shares of U.S. Government Fund as of
the same date. For purposes hereof, shares of U.S. Government Fund exchanged
for cash or other property, surrendered by dissenters, or exchanged for cash in
lieu of fractional Shares of Government Income Fund will be treated as
outstanding shares of U.S. Government Fund at the Closing Date of the
Reorganization. Moreover, shares of U.S. Government Fund and Shares of
Government Income Fund held by U.S. Government Fund shareholders and otherwise
sold, redeemed, or disposed of prior or subsequent to the Reorganization and as
part of the Reorganization will be considered in making this assumption.
3. Pursuant to the Agreement, U.S. Government Fund will distribute in
liquidation of U.S. Government Fund, the Shares of Government Income Fund
received by U.S. Government Fund in the Reorganization.
<PAGE>
Prudential U.S. Government Fund
Prudential Government Income Fund, Inc.
October 20, 1995
Page 3
4. The liabilities of U.S. Government Fund assumed by Government Income
Fund pursuant to the Reorganization, plus the liabilities, if any, to which
assets transferred pursuant to the Reorganization will be subject will
constitute less than 20% of the total consideration for the Reorganization, all
such liabilities will have been incurred by U.S. Government Fund in the ordinary
course of its business, and Government Income Fund will pay no other
consideration, except for the Shares, in connection with the Reorganization.
5. All expenses incurred by each Fund with respect to the Reorganization
will be borne by of each Fund on a pro rata basis (in accordance with the
relative net asset values of the Funds). Each shareholder of U.S. Government
Fund will pay its share of expenses, if any, incurred in connection with the
Reorganization.
6. No intercorporate indebtedness will exist between Government Income
Fund and U.S. Government Fund that was issued, acquired, or will be settled at a
discount.
7. U.S. Government Fund will not own, directly or indirectly, nor will it
have owned during the five years preceding the Closing Date, directly or
indirectly, any shares of stock of Government Income Fund.
8. The assets of U.S. Government Fund transferred to Government Income
Fund will include all assets owned by U.S. Government Fund at fair market value
on the Closing Date subject to all known liabilities of U.S. Government Fund at
such time.
9. In accordance with the terms of the Agreement, U.S. Government Fund
will transfer all of its business and will transfer assets to Government Income
Fund representing at least 90% of the fair market value of the net assets, and
at least 70% of the fair market value of the gross assets, held by U.S.
Government Fund immediately prior to the Reorganization. For purposes of this
assumption, amounts paid by U.S. Government Fund to shareholders who receive
cash or other property, amounts paid to dissenters, amounts used by U.S.
Government Fund to pay its reorganization expenses and all redemptions and
distributions (other than regular, normal redemptions and dividends) made by
U.S. Government Fund immediately preceding the Reorganization will be included
as assets of U.S. Government Fund held immediately prior to the Reorganization.
10. The fair market value of the assets of U.S. Government Fund
transferred to Government Income Fund will equal or exceed the sum of
liabilities assumed by Government
<PAGE>
Prudential U.S. Government Fund
Prudential Government Income Fund, Inc.
October 20, 1995
Page 4
Income Fund, plus the amount of liabilities, if any, to which the transferred
assets will be subject.
11. U.S. Government Fund will not be under the jurisdiction of a court in
a Title 11 or similar case within the meaning of Section 368(a)(3)(A) of the
Internal Revenue Code of 1986, as amended (the "Code").
12. No cash will be paid to the shareholders of U.S. Government Fund in
lieu of fractional shares.
13. For federal income tax purposes, U.S. Government Fund will qualify as
a regulated investment company (as defined in Code Section 851) and will have so
qualified since its formation. The provisions of Code Sections 851 through 855
will apply to U.S. Government Fund and will continue to apply through the
Closing Date.
14. As of the Closing Date, U.S. Government Fund will have declared to its
shareholders of record a dividend or dividends payable prior to closing, which
together with all previous such dividends will have the effect of distributing
all of U.S. Government Fund's investment company taxable income plus the excess
of its interest income, if any, excludable from gross income under Code Section
103(a) over its deductions disallowed under Sections 265 and 171(a)(2) for the
taxable year of U.S. Government Fund ending on the Closing Date and all its net
capital gain realized in such taxable year.
15. Except to the extent necessary to comply with its legal obligation to
redeem its own shares, Government Income Fund will have no plan or intention to
reacquire any of the Shares issued in the Reorganization.
16. Government Income Fund will have no plan or intention to sell or
otherwise dispose of any of the assets of the U.S. Government Fund acquired in
the Reorganization, except for dispositions made in the ordinary course of
business.
17. Following the Reorganization, Government Income Fund will continue the
historic business of U.S. Government Fund or use a significant portion of U.S.
Government Fund's historic business assets in its business.
18. Government Income Fund will not own, directly or indirectly, nor will
it have owned during the five years preceding the Closing Date, directly or
indirectly, any shares of U.S. Government Fund.
<PAGE>
Prudential U.S. Government Fund
Prudential Government Income Fund, Inc.
October 20, 1995
Page 5
19. Government Income Fund will not be under the jurisdiction of a court
in a Title 11 or similar case within the meaning of Code Section 368(a)(3)(A).
20. At the Closing Date, Government Income Fund will qualify as a
regulated investment company (as defined in Code Section 851) and will have so
qualified since its formation. The provisions of Code Sections 851 through 855
will apply to Government Income Fund prior to the Reorganization and will
continue to apply after the Closing Date.
Based on the foregoing and subject to the assumptions and limitations set
forth above and such examination of law as we have deemed necessary, we are of
the opinion that:
1. The Reorganization will constitute a reorganization within the meaning
of Section 368(a)(1)(C) of the Code;
2. U.S. Government Fund and Government Income Fund will each be a "party
to a reorganization" within the meaning of Section 368(b) of the Code;
3. Pursuant to Sections 361(a) and 357(a) of the Code, no gain or loss
will be recognized by U.S. Government Fund upon the transfer of its
assets to Government Income Fund in exchange solely for Shares of
Government Income Fund as a result of the Reorganization and the
assumption by Government Income Fund of U.S. Government Fund's
liabilities, if any, or upon the distribution (whether actual or
constructive) of the Shares of Government Income Fund in complete
liquidation of U.S. Government Fund;
4. Pursuant to Section 1032(a) of the Code, no gain or loss will be
recognized by Government Income Fund upon its acquisition of U.S.
Government Fund's assets solely in exchange for Shares of Government
Income Fund and the assumption by Government Income Fund of the
liabilities of U.S. Government Fund;
5. Pursuant to Section 362(b) of the Code, the basis of the assets of
U.S. Government Fund acquired by Government Income Fund will be the
same as the basis of such assets when held by U.S. Government Fund
immediately prior to the Reorganization;
<PAGE>
Prudential U.S. Government Fund
Prudential Government Income Fund, Inc.
October 20, 1995
Page 6
6. Pursuant to Section 1223(2) of the Code, the holding period of the
assets of U.S. Government Fund acquired by Government Income Fund will
include the period during which such assets were held by U.S.
Government Fund;
7. Pursuant to Section 354(a)(1) of the Code, no gain or loss will be
recognized by a shareholder of U.S. Government Fund upon the exchange
of his or her shares for Shares of Government Income Fund, including
fractional shares, in liquidation of U.S. Government Fund;
8. Pursuant to Section 358(a)(1) of the Code, the basis of the Shares of
Government Income Fund received by former U.S. Government Fund
shareholders will be the same as the basis of U.S. Government Fund
shares surrendered in exchange therefor; and
9. Pursuant to Section 1223(1) of the Code, the holding period for Shares
of Government Income Fund received by each shareholder of U.S.
Government Fund in exchange for his or her shares of U.S. Government
Fund will include the period during which such shareholder held shares
of U.S. Government Fund (provided U.S. Government Fund shares were
held as capital assets on the date of the exchange).
We note that we are members of the Bar of the State of New York and are not
members of the Bar of, or authorized to practice law in, any other jurisdiction,
and that our opinion is expressly limited to the federal laws of the United
States.
The opinions expressed herein are based upon currently applicable statutes
and regulations and existing interpretations. We can provide no assurance that
such statutes or regulations, or existing judicial or administrative
interpretations thereof, will not be amended, revoked or modified (possibly
prior to the Closing Date) in a manner which would affect our conclusions.
Finally, we note that this opinion is solely for the benefit of the addressees
hereof in connection with the transaction described herein and, except as
otherwise provided herein, should not be referred to, used, relied upon or
quoted (with or without specific reference to our firm) in any documents,
reports, financial statements or otherwise, without our prior written consent.
<PAGE>
Prudential U.S. Government Fund
Prudential Government Income Fund, Inc.
October 20, 1995
Page 7
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name and to any reference to our
firm in the Registration Statement or in the Prospectus constituting part
thereof.
Very truly yours,
/s/ Shereff, Friedman, Hoffman & Goodman, LLP
Shereff, Friedman, Hoffman & Goodman, LLP
SFH&G:JHN:MKN:SDB:KLJ:dmw
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the use in this Registration Statement on Form N-14 of
Prudential Government Income Fund, Inc. of our reports on the financial
statements of the Prudential Government Income Fund, Inc. dated April 13,
1995 and Prudential U.S. Government Fund dated December 16, 1994 (the
"Portfolios"), which are incorporated by reference in and are a part of such
Registration Statement, and to the references to us under the headings
"Financial Highlights" in the Prospectus of each Portfolio, which are
incorporated by reference in and are a part of such Registration Statement,
and "Custodian, Transfer and Dividend Disbursing Agent and Independent
Accountants" in the Statement of Additional Information of each Portfolio,
which are incorporated by reference in such Registration Statement (and is a
part of such Registration Statement for the Prudential Government Income
Fund, Inc.).
/s/ Deloitte & Touche LLP
- -------------------------
Deloitte & Touche LLP
New York, New York
October 18, 1995
<PAGE>
EXHIBIT 17(A)
PRUDENTIAL U.S. PROXY THIS PROXY IS SOLICITED ON BEHALF OF THE
GOVERNMENT FUND TRUSTEES
ONE SEAPORT PLAZA The undersigned hereby appoints S. Jane Rose,
NEW YORK, NEW YORK 10292 Ellyn C. Acker and Eugene S. Stark as Proxies,
each with the power of substitution, and
hereby authorizes each of them to represent
and to vote, as designated below, all the
shares of Prudential U.S. Government Fund,
held of record by the undersigned on November
2, 1995 at the Special Meeting of Shareholders
to be held on January 12, 1996, or any
adjournment thereof.
THE TRUSTEES RECOMMEND A VOTE "FOR" THE FOLLOWING PROPOSAL.
1. Approval or disapproval of the Agreement and Plan of Reorganization and
Liquidation
/ / APPROVE
/ / DISAPPROVE
/ / ABSTAIN
2. In their discretion, the Proxies are authorized to vote upon such other
business as may properly come before the Meeting.
(OVER)
<PAGE>
(CONTINUED FROM OTHER SIDE)
PLEASE MARK, SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY, USING THE ENCLOSED
ENVELOPE.
THIS PROXY WHEN EXECUTED WILL BE VOTED IN THE MANNER DESCRIBED HEREIN BY THE
UNDERSIGNED SHAREHOLDER. IF EXECUTED AND NO DIRECTION IS MADE, THIS PROXY WILL
BE VOTED FOR PROPOSAL 1.
Please sign exactly as name appears below. When shares are held by joint
tenants, both should sign.
When signing as attorney, executor, administrator,
trustee or guardian, please give full title as
such. If a corporation, please sign in full
corporate name by president or other authorized
officer. If a partnership, please sign in partner-
ship name by authorized person.
Dated ---------------------------------- , 199
----------------------------------------------
Signature
----------------------------------------------
Signature if held jointly
<PAGE>
EXHIBIT 17(B)
[LOGO]
- --------------------------------------------------------------------------------
To Our
Clients:
YOUR VOTE IS IMPORTANT! Prudential Securities Incorporated, One
Seaport Plaza, New York, NY 10292
-----------------------------------------------------------------------
We have been requested to forward to you the enclosed proxy
material relative to shares carried by us in your account but not
registered in your name. Such shares can be voted only by us as as
the holder of record.
We shall be pleased to vote your shares in accordance with your
wishes. If you will execute the enclosed form and return it to us
promptly in the self-addressed stamped envelope, also enclosed. It
is understood that, if you sign without otherwise marking the form,
the shares will be voted as recommended by the management on all
matters to be considered at the meeting.
WE URGE YOU TO SEND IN YOUR PROXY SO THAT WE MAY VOTE YOUR SHARES
IN ACCORDANCE WITH YOUR WISHES.
The rules of the New York Stock Exchange provide that if
instructions are not received by the tenth day before the meeting,
the proxy may be given at discretion by the holder of record of the
shares. If you are unable to communicate with us by such date, we
will, nevertheless, follow your instructions even if our
discretionary vote has already been given, provided your
instructions are received prior to the stockholders' meeting.
Should you wish to attend the meeting in person or have a proxy
covering your shares, we shall be pleased to issue the same to you.
Prudential Securities Incorporated Form 2502 (Rev. 3-93)
YOUR VOTE IS IMPORTANT! PROXY SERVICES, PO BOX 550, NEW YORK, NY
We have been requested to forward to you the enclosed proxy material
relative to shares carried by us in your account but not registered in your
name. Such shares can be voted only by us as the holder of record.
We shall be pleased to vote your shares in accordance with your wishes, if
you will execute the enclosed form and return it to us promptly in the
self-addressed stamped envelope, also enclosed. It is understood that, if
you sign without otherwise marking the form, the shares will be voted as
recommended by the management on all matters to be considered at the
meeting.
WE URGE YOU TO SEND IN YOUR PROXY SO THAT WE MAY VOTE YOUR SHARES IN
ACCORDANCE WITH YOUR WISHES.
The rules of the New York Stock Exchange provide that if instructions are
not received by the tenth day before the meeting, the proxy may be given at
discretion by the holder of record of the shares. If you are unable to
communicate with us by such date, we will, nevertheless, follow your
instructions even if our discretionary vote has already been given, provided
your instructions are received prior to the stockholders' meeting.
Should you wish to attend the meeting in person or have a proxy covering
your shares, we shall be pleased to issue the same to you.
FORM 2502 (REV. 2/95)
<PAGE>
EXHIBIT 17C
PRUDENTIAL U.S. GOVERNMENT FUND
Dear Shareholder of Prudential U.S. Government Fund:
You may be aware that the Trustees of Prudential U.S. Government Fund have
recently approved a proposal to transfer the assets and liabilities of your fund
in exchange for shares of Prudential Government Income Fund, Inc. The enclosed
proxy materials describe this proposal in detail. If the proposal is approved
and implemented, you will automatically become a shareholder of the Prudential
Government Income Fund. This Fund's investment policies and risks are detailed
in the enclosed prospectus.
The other Trustees and I strongly recommend that you vote FOR the proposal.
We believe that this transaction serves your interests in the following ways:
- SIMILAR STRATEGIES. The funds' investment objectives and strategies, while
not identical, are similar.
- SAME PORTFOLIO MANAGER. Barbara L. Kenworthy, portfolio manager of
Prudential U.S. Government Fund, also manages the Prudential Government
Income Fund. Ms. Kenworthy has 20 years of investment management
experience in both U.S. and foreign securities and investment grade and
high yield quality bonds. She selects the sectors, maturities and
individual bonds she believes provide the best value under various
economic conditions. She is assisted by two credit analysis teams.
- A HISTORY OF STRONG PERFORMANCE. The Prudential Government Income Fund has
provided consistent performance over the long term with an average annual
return for the trailing 5-year period of more than 7.5% for both Class A
and Class B shares (as of 9/30/95).* Of course, past performance is no
assurance of future results.
- REDUCED EXPENSES. Combining the funds may benefit you in the form of
reduced expenses as a percentage of net assets.
Please read the enclosed materials carefully for more complete information.
Your vote is important, no matter how many shares you own. Voting your
shares early may permit your Fund to avoid costly follow-up mail and telephone
solicitation. After you have reviewed the enclosed materials, please complete,
date and sign your proxy card and mail it in the enclosed postage-paid return
envelope today.
Thank you for the confidence you've placed in the Prudential Mutual Funds.
We hope to continue to earn it in the years to come.
Sincerely,
Richard A. Redeker
PRESIDENT, Prudential U.S. Government
Fund
<PAGE>
* SEC Average Annual Total Return as of 9/30/95 for Prudential Government
Income Fund.
<TABLE>
<CAPTION>
SINCE DATE OF
1 YEAR 3 YEARS 5 YEARS INCEPTION INCEPTION
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Class A Shares..................................................... XX% XX% XX% XX% 1/90
Class B Shares..................................................... XX% XX% XX% XX%(1) 4/85
Class C Shares..................................................... XX% N/A N/A XX% 8/94
</TABLE>
- ------------
(1) Without management fee waiver and/or expense subsidization, the Portfolio's
average annual total return would have been slightly lower.
Source: Prudential Mutual Fund Management. Past performance is not indicative of
future results. The principal value and investment returns will fluctuate so
that an investor's shares, when redeemed may be worth more or less than their
original cost. The calculation of average annual total returns assumes the
effects of the current maximum applicable front-end sales charge for Class A
shares and contingent deferred sales charges for Class B shares and Class C
shares. On August 1, 1994, the maximum front-end sales charge for Class A shares
of Prudential Government Income Fund was reduced from 4.50% to 4.00%.
Calculations using the maximum front-end sales charge in effect prior to August
1, 1994 would have resulted in lower average annual total returns for Class A
shares. Class B shares of the Fund are subject to a 6-year contingent deferred
sales charge (CDSC) of 5%, 4%, 3%, 2%, 1% and 1%. Class C shares have a 1% CDSC
for one year. Class B shares will automatically convert to Class A shares on a
quarterly basis, after approximately seven years. Class A shares, Class B shares
and Class C shares have a common portfolio. Performance results through the
Fund's fiscal year end can be found in the enclosed materials.
<PAGE>
As filed with the Securities and Exchange Commission on April 11, 1983
Registration No. 2-
________________________________________________________________________________
________________________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
__________________
FORM N-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /X/
Pre-Effective Amendment No. ____
Post-Effective Amendment No. ____
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 /X/
Amendment No. ____
(Check appropriate box or boxes)
__________________
PRUDENTIAL-BACHE TELECOMMUNICATIONS
FUND, INC.
(Exact name of registrant as specified in charter)
100 GOLD STREET
NEW YORK, NEW YORK 10292
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code (212) 791-2139
THOMAS J. PRESS, Esq.
100 Gold Street
New York, New York 10292
(Name and Address of Agent for Service)
Copy to:
Scott F. Smith, Esq.
Sullivan & Cromwell
125 Broad Street
New York, New York 10004
Approximate date of proposed public offering:
As soon as practicable after the effective date of this registration statement.
It is proposed that this filing will become effective:
/ / Immediately upon filing pursuant to paragraph (b), or
/ / 60 days after filing pursuant to paragraph (a), or
/ / on (date), pursuant to paragraph (b),
/ / on (date), pursuant to paragraph (a), of Rule 485 or 486.
_____________________
Pursuant to Rule 24f-2 under the Investment Company Act of 1940, Registrant
hereby elects to register an indefinite number of its shares of common stock,
$.01 par value. The amount of the registration fee is $500.00.
The Registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
________________________________________________________________________________
________________________________________________________________________________
<PAGE>
EXHIBIT 17E
PRUDENTIAL GOVERNMENT INCOME FUND, INC.
- -------------------------------------------
PROSPECTUS DATED MAY 1, 1995
- ------------------------------------------------------------------
Prudential Government Income Fund, Inc. (formerly, Prudential-Bache Government
Plus Fund, Inc.) (the Fund), is an open-end, diversified management investment
company, or mutual fund, which has as its investment objective the seeking of a
high current return. The Fund will seek to achieve this objective primarily by
investing in U.S. Government securities, including U.S. Treasury Bills, Notes,
Bonds and other debt securities issued by the U.S. Treasury, and obligations
issued or guaranteed by U.S. Government agencies or instrumentalities, and by
engaging in various derivative transactions such as the purchase and sale of put
and call options. In an effort to hedge against changes in interest rates and
thus preserve its capital, the Fund may also engage in transactions involving
futures contracts on U.S. Government securities and options on such futures. See
"How the Fund Invests--Investment Objective and Policies." There can be no
assurance that the Fund's investment objective will be achieved. The Fund's
address is One Seaport Plaza, New York, New York 10292, and its telephone number
is (800) 225-1852.
This Prospectus sets forth concisely the information about the Fund that a
prospective investor should know before investing. Additional information about
the Fund has been filed with the Securities and Exchange Commission in a
Statement of Additional Information, dated May 1, 1995, which information is
incorporated herein by reference (is legally considered a part of this
Prospectus) and is available without charge upon request to the 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 GOVERNMENT INCOME FUND, INC.?
Prudential Government Income Fund, Inc. is a mutual fund. A mutual fund pools
the resources of investors by selling its shares to the public and investing the
proceeds of such sale in a portfolio of securities designed to achieve its
investment objective. Technically, the Fund is an open-end, diversified
management investment company.
WHAT IS THE FUND'S INVESTMENT OBJECTIVE?
The Fund's investment objective is to seek a high current return. The Fund
seeks to achieve its objective primarily by investing in U.S. Government
securities, including U.S. Treasury Bills, Notes, Bonds, and other debt
securities issued by the U.S. Treasury, and obligations issued or guaranteed by
U.S. Government agencies or instrumentalities. The Fund may also write covered
call options and covered put options and purchase put and call options. There
can be no assurance that the Fund's investment objective will be achieved. See
"How the Fund Invests--Investment Objective and Policies" at page 8.
RISK FACTORS AND SPECIAL CHARACTERISTICS
The Fund may engage in short selling and use leverage, including dollar rolls
and bank borrowings, which entail additional risks to the Fund. See "How the
Fund Invests--Other Investment Information" at page 15. The Fund may also engage
in various hedging and income enhancement strategies, including derivative
transactions such as the purchase and sale of put and call options on U.S.
Government securities, transactions involving futures contracts on U.S.
Government securities and options on such futures contracts and in interest rate
swap transactions. See "How the Fund Invests--Other Investments and Policies" at
page 9.
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 up to $3 billion and .35 of 1% of the
average daily net assets in excess of $3 billion. As of March 31, 1995, PMF
served as manager or administrator to 68 investment companies, including 39
mutual funds, with aggregate assets of approximately $46 billion. The Prudential
Investment Corporation (PIC or the Subadviser) furnishes investment advisory
services in connection with the management of the Fund under a Subadvisory
Agreement with PMF. See "How the Fund is Managed--Manager" at page 17.
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 paid an annual distribution and service fee
which is currently being charged at the 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. PSI is paid an annual
distribution and service fee with respect to Class B shares which is currently
being charged at the annual rate of .825 of 1% of the average daily net assets
of the Class B shares up to $3 billion, .80 of 1% of the next $1 billion of such
net assets and .50 of 1% of such net assets in excess of $4 billion. PSI is paid
an annual distribution and service fee with respect to Class C shares which is
currently being charged at the annual rate of .75 of 1% of the average daily net
assets of the Class C shares. See "How the Fund is Managed--Distributor" at page
17.
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 24 and "Shareholder Guide--Shareholder Services"
at page 32.
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 20 and "Shareholder Guide--How to Buy Shares of the Fund" at page 24.
WHAT ARE MY PURCHASE ALTERNATIVES?
The Fund offers three classes of shares:
- 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
distribution-related 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.
See "Shareholder Guide--Alternative Purchase Plan" at page 25.
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 27.
HOW ARE DIVIDENDS AND DISTRIBUTIONS PAID?
The Fund expects to declare daily and pay monthly dividends of net investment
income and make distributions of any net capital gains at least annually.
Dividends and distributions will be automatically reinvested in additional
shares of the Fund at NAV without a sales charge unless you request that they be
paid to you in cash. See "Taxes, Dividends and Distributions" at page 21.
3
<PAGE>
FUND EXPENSES
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES+ CLASS A SHARES CLASS B SHARES CLASS C SHARES
-------------- ------------------------ ------------------------
<S> <C> <C> <C>
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price)..... 4% None None
Maximum Sales Load Imposed or Deferred
Sales Load on Reinvested Dividends...... None None None
Deferred Sales Load (as a percentage of
original purchase price or redemption
proceeds, whichever is lower)........... None 5% during the first 1% on redemptions made
year, decreasing by 1% within one year of
annually to 1% in the purchase
fifth and sixth years
and 0% in the seventh
year*
Redemption Fees.......................... None None None
Exchange Fee............................. None None None
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets) CLASS A SHARES CLASS B SHARES CLASS C SHARES**
-------------- ------------------------ ------------------------
<S> <C> <C> <C>
Management Fees.......................... .50% .500% .50%
12b-1 Fees++............................. .15% .825% .75%
Other Expenses........................... .30% .300% .30%
----- ------ -----
Total Fund Operating Expenses............ .95% 1.625% 1.55%
----- ------ -----
----- ------ -----
</TABLE>
<TABLE>
<CAPTION>
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000
investment, assuming (1) 5% annual return and (2)
redemption at the end of each time period:
Class A................................................ $ 50 $ 70 $ 92 $ 155
Class B................................................ $ 67 $ 82 $100 $ 153
Class C**.............................................. $ 26 $ 50 $ 86 $ 188
You would pay the following expenses on the same
investment, assuming no redemption:
Class A................................................ $ 50 $ 70 $ 92 $ 155
Class B................................................ $ 17 $ 52 $ 90 $ 170
Class C**.............................................. $ 16 $ 50 $ 86 $ 188
The above example with respect to Class A, Class B and Class C shares is based on restated data for the
Fund's fiscal year ended February 28, 1995. The above example with respect to Class C shares is based on
expenses expected to be incurred if Class C shares had been in existence during the entire fiscal year
ended February 28, 1995. 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" include operating expenses of
the Fund, such as Directors' and professional fees, registration fees, reports to shareholders and transfer
agency and custodian fees.
<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 entire fiscal year ended February
28, 1995.
+ Pursuant to rules of the National Association of Securities Dealers, Inc.,
the aggregate initial sales charges, deferred sales charges and asset-based
sales charges on shares of the Fund may not exceed 6.25% of total gross
sales, subject to certain exclusions. This 6.25% limitation is imposed on
each class of the Fund rather than on a per shareholder basis. Therefore,
long-term shareholders of the Fund may pay more in total sales charges than
the economic equivalent of 6.25% of such shareholders' investment in such
shares. See "How the Fund is Managed--Distributor."
++ Although the Class A, Class B and Class C Distribution and Service Plans
provide that the Fund may pay a distribution fee of up to .30 of 1% per
annum of the average daily net assets of the Class A shares, and up to 1%
per annum of the average daily net assets of the Class B and Class C
shares, the Distributor has agreed to limit its distribution fees with
respect to Class A shares of the Fund to no more than .15 of 1% of the
average daily net assets of the Class A shares, to no more than .825 of 1%
of the average daily net assets of the Class B shares and to no more than
.75 of 1% of the average daily net assets of the Class C shares for the
fiscal year ending February 28, 1996. See "How the Fund is
Managed--Distributor." Total operating expenses without such limitations
would be 1.10% for Class A shares and 1.80% for each of the Class B shares
and Class C shares.
</TABLE>
4
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE PERIODS INDICATED)
(CLASS A SHARES)
The following financial highlights for the Class A shares have been audited
by Deloitte & Touche LLP, independent accountants, whose report thereon was
unqualified. This information should be read in conjunction with the financial
statements and the notes thereto, which appear in the Statement of Additional
Information. The financial highlights contain selected data for a Class A share
of common stock outstanding, total return, ratios to average net assets and
other supplemental data for the periods indicated. The information has been
determined based on data generally as provided in the financial statements.
<TABLE>
<CAPTION>
JANUARY 22,
1990+
YEARS ENDED FEBRUARY 28/29 THROUGH
------------------------------------------------ FEBRUARY
1995 1994 1993 1992 1991 28, 1990
-------- -------- -------- -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
period....................... $ 9.13 $ 9.40 $ 9.17 $ 9.02 $ 9.00 $ 9.17
-------- -------- -------- -------- -------- -----------
Income from investment
operations
Net investment income......... 0.59 0.61 0.66 0.68 0.69 0.06
Net realized and unrealized
gain (loss) on investment
transactions................. (0.54) (0.25) 0.35 0.37 0.26 (0.11)
-------- -------- -------- -------- -------- -----------
Total from investment
operations............... 0.05 0.36 1.01 1.05 0.95 (0.05)
-------- -------- -------- -------- -------- -----------
Less distributions
Dividends from net investment
income....................... (0.59) (0.61) (0.66) (0.68) (0.69) (0.06)
Distributions in excess of
accumulated gains............ -- (0.02) -- -- -- --
Distributions from paid-in
capital in excess of par..... -- -- (0.12) (0.22) (0.24) (0.06)
-------- -------- -------- -------- -------- -----------
Total distributions....... (0.59) (0.63) (0.78) (0.90) (0.93) (0.12)
-------- -------- -------- -------- -------- -----------
Net asset value, end of
period....................... $ 8.59 $ 9.13 $ 9.40 $ 9.17 $ 9.02 $ 9.00
-------- -------- -------- -------- -------- -----------
-------- -------- -------- -------- -------- -----------
TOTAL RETURN:++............... .83% 3.90% 11.55% 12.18% 11.21% (0.54)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)........................ $871,145 $51,673 $61,297 $33,181 $28,971 $1,961
Average net assets (000)...... $ 95,560 $55,921 $46,812 $29,534 $23,428 $ 501
Ratios to average net assets:
Expenses, including
distribution fees........ 0.98% 0.84% 0.84% 0.86% 0.85% 0.92%*
Expenses, excluding
distribution fees........ 0.83% 0.69% 0.69% 0.71% 0.70% 0.76%*
Net investment income..... 7.49% 6.48% 7.17% 7.51% 7.76% 9.11%*
Portfolio turnover rate....... 206% 80% 36% 187% 213% 329%
<FN>
-------------
* Annualized.
+ Commencement of offering of Class A shares.
++ 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 PERIODS INDICATED)
(CLASS B SHARES)
The following financial highlights for the Class B shares have been audited by
Deloitte & Touche LLP, independent accountants, whose report thereon was
unqualified. This information should be read in conjunction with the financial
statements and the notes thereto, which appear in the Statement of Additional
Information. The financial highlights contain selected data for a Class B share
of common stock outstanding, total return, ratios to average net assets and
other supplemental data for the periods indicated. This information has been
determined based on data generally as provided in the financial statements.
<TABLE>
<CAPTION>
APRIL 22,
1985*
YEARS ENDED FEBRUARY 28/29 THROUGH
------------------------------------------------------------------------------------------------- FEBRUARY
1995 1994 1993 1992 1991 1990 1989*** 1988 1987 28, 1986
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of
period............. $ 9.13 $ 9.40 $ 9.17 $ 9.02 $ 9.00 $ 9.09 $ 9.85 $ 10.59 $ 10.60 $10.00
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Income from
investment
operations
Net investment
income............. 0.53 0.53 0.58 0.60 0.62 0.68 0.69 0.67 0.70 0.74+
Net realized and
unrealized gain
(loss) on
investment
transactions....... (0.53) (0.25) 0.35 0.37 0.26 0.15 (0.49) (0.40) 0.35 0.84
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Total from
investment
operations..... -- 0.28 0.93 0.97 0.88 0.83 0.20 0.27 1.05 1.58
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Less distributions
Dividends from net
investment
income............. (0.53) (0.53) (0.58) (0.60) (0.62) (0.68) (0.69) (0.67) (0.70) (0.74)
Distributions from
net realized
gains.............. -- -- -- -- -- -- -- (0.24) (0.36) (0.24)
Distributions in
excess of
accumulated
gains.............. -- (0.02) -- -- -- -- -- -- -- --
Distributions from
paid-in capital in
excess of par...... -- -- (0.12) (0.22) (0.24) (0.24) (0.27) (0.10) -- --
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Total
distributions... (0.53) (0.55) (0.70) (0.82) (0.86) (0.92) (0.96) (1.01) (1.06) (0.98)
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Net asset value, end
of period.......... $ 8.60 $ 9.13 $ 9.40 $ 9.17 $ 9.02 $ 9.00 $ 9.09 $ 9.85 $ 10.59 $10.60
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
TOTAL RETURN:++..... .24% 3.03% 10.61% 11.27% 10.35% 10.49% 2.32% 3.36% 10.30% 16.55%
RATIOS/SUPPLEMENTAL
DATA:
Net assets, end of
period (000)....... $ 705,732 $2,202,555 $2,680,259 $2,724,428 $3,127,587 $3,760,003 $3,814,945 $3,995,721 $4,090,417 $3,943,495
Average net assets
(000).............. $1,735,413 $2,487,990 $2,670,924 $2,903,704 $3,432,948 $3,814,455 $3,984,300 $3,796,998 $3,978,186 $2,876,209
Ratios to average
net assets:
Expenses,
including
distribution
fees........... 1.66% 1.68% 1.69% 1.71% 1.67% 1.49% 1.35% 1.60% 1.53% 1.48%**+
Expenses,
excluding
distribution
fees........... 0.80% 0.69% 0.69% 0.71% 0.70% 0.64% 0.63% 0.65% 0.61% 0.54%**+
Net investment
income......... 6.17% 5.64% 6.32% 6.66% 6.94% 7.46% 7.61% 6.88% 6.56% 8.10%**+
Portfolio turnover
rate............... 206% 80% 36% 187% 213% 329% 278% 147% 266% 245%
<FN>
-------------
* Commencement of operations.
** Annualized.
*** On July 1, 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 subsidy.
++ 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>
6
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD INDICATED)
(CLASS C SHARES)
The following financial highlights for the Class C shares have been audited by
Deloitte & Touche LLP, independent accountants, whose report thereon was
unqualified. This information should be read in conjunction with the financial
statements and the notes thereto, which appear in the Statement of Additional
Information. The financial highlights contain selected data for a Class C share
of common stock outstanding, total return, ratios to average net assets and
other supplemental data for the period indicated. This information has been
determined based on data generally as provided in the financial statements.
<TABLE>
<CAPTION>
AUGUST 1,
1994*
THROUGH
FEBRUARY 28,
1995
-------------
<S> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
period....................... $ 8.69
-----
Income from investment
operations
Net investment income......... 0.31
Net realized and unrealized
gain (loss) on investment
transactions................. (0.09)
-----
Total from investment
operations............... 0.22
-----
Less distributions
Dividends from net investment
income....................... (0.31)
Distributions from net
realized gains............... --
Distributions in excess of
accumulated gains............ --
Distributions from paid-in
capital in excess of par..... --
-----
Total distributions....... (0.31)
-----
Net asset value, end of
period....................... $ 8.60
-----
-----
TOTAL RETURN:++............... 2.75%
RATIOS/SUPPLEMENTAL DATA:+
Net assets, end of period
(000)........................ $204
Average net assets (000)...... $111
Ratios to average net assets:
Expenses, including
distribution fees........ 1.63%**
Expenses, excluding
distribution fees........ 0.88%**
Net investment income..... 6.71%**
Portfolio turnover rate....... 206%
<FN>
-------------
* Commencement of offering of Class C shares.
** Annualized.
+ The offering of Class C shares commenced on August 1, 1994, accordingly the
ratios for Class C shares are not necessarily comparable to those of Class A
and Class B shares and are not necessarily indicative of future ratios.
++ 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 the period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
</TABLE>
7
<PAGE>
HOW THE FUND INVESTS
INVESTMENT OBJECTIVE AND POLICIES
THE FUND'S INVESTMENT OBJECTIVE IS TO SEEK A HIGH CURRENT RETURN. THE FUND
WILL SEEK TO ACHIEVE THIS OBJECTIVE PRIMARILY BY INVESTING IN U.S. GOVERNMENT
SECURITIES, INCLUDING U.S. TREASURY BILLS, NOTES, BONDS AND OTHER DEBT
SECURITIES ISSUED BY THE U.S. TREASURY, AND OBLIGATIONS ISSUED OR GUARANTEED BY
U.S. GOVERNMENT AGENCIES OR INSTRUMENTALITIES; WRITING COVERED CALL OPTIONS AND
COVERED PUT OPTIONS AND PURCHASING PUT AND CALL OPTIONS. THESE GUARANTEES APPLY
ONLY TO THE PAYMENT OF PRINCIPAL AND INTEREST ON THESE SECURITIES AND DO NOT
EXTEND TO THE SECURITIES' YIELD OR VALUE, WHICH ARE LIKELY TO VARY WITH
FLUCTUATIONS IN INTEREST RATES, NOR DO THE GUARANTEES EXTEND TO THE YIELD OR
VALUE OF THE FUND'S SHARES. SEE "INVESTMENT OBJECTIVE AND POLICIES--U.S.
GOVERNMENT SECURITIES--MORTGAGE-RELATED SECURITIES ISSUED BY U.S. GOVERNMENT
INSTRUMENTALITIES" IN THE STATEMENT OF ADDITIONAL INFORMATION. THE FUND HAS NO
LIMITATIONS WITH RESPECT TO THE MATURITIES OF PORTFOLIO SECURITIES IN WHICH IT
MAY INVEST. HIGH CURRENT RETURN MEANS THE RETURN RECEIVED FROM INTEREST INCOME
FROM U.S. GOVERNMENT AND OTHER DEBT SECURITIES AND FROM NET GAINS REALIZED FROM
SALES OF PORTFOLIO SECURITIES. THE FUND MAY ALSO REALIZE INCOME FROM PREMIUMS
FROM COVERED PUT AND CALL OPTIONS WRITTEN BY THE FUND ON U.S. GOVERNMENT
SECURITIES AS WELL AS OPTIONS ON FUTURES CONTRACTS ON U.S. GOVERNMENT SECURITIES
AND NET GAINS FROM CLOSING PURCHASE AND SALES TRANSACTIONS WITH RESPECT TO THESE
OPTIONS. AT LEAST 65% OF THE TOTAL ASSETS OF THE FUND WILL BE INVESTED IN U.S.
GOVERNMENT SECURITIES. THERE CAN BE NO ASSURANCE THAT THE FUND'S INVESTMENT
OBJECTIVE WILL BE ACHIEVED. See "Investment Objective and Policies" in the
Statement of Additional Information.
THE FUND'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's net asset value will vary with changes in the values of the Fund's
portfolio securities, which values will generally vary inversely with changes in
interest rates. The writing of options on U.S. Government securities and options
on futures contracts on U.S. Government securities may limit the Fund's
potential for capital gains on its portfolio.
U.S. GOVERNMENT SECURITIES
U.S. TREASURY SECURITIES
THE FUND WILL INVEST IN U.S. TREASURY SECURITIES, INCLUDING BILLS, NOTES,
BONDS AND OTHER DEBT SECURITIES ISSUED BY THE U.S. TREASURY. These instruments
are direct obligations of the U.S. Government and, as such, are backed by the
"full faith and credit" of the United States. They differ primarily in their
interest rates, the lengths of their maturities and the dates of their
issuances.
SECURITIES ISSUED OR GUARANTEED BY U.S. GOVERNMENT AGENCIES AND
INSTRUMENTALITIES
THE FUND WILL INVEST IN SECURITIES ISSUED BY AGENCIES OF THE U.S. GOVERNMENT
OR INSTRUMENTALITIES OF THE U.S. GOVERNMENT. These obligations, including those
which are guaranteed by federal agencies or instrumentalities, may or may not be
backed by the "full faith and credit" of the United States. Obligations of the
Government National Mortgage Association (GNMA), the Farmers Home Administration
and the Export-Import Bank are backed by the full faith and credit of the United
States. In the case of securities not backed by the full faith and credit of the
United States, the Fund must look principally to the agency
8
<PAGE>
issuing or guaranteeing the obligation for ultimate repayment and may not be
able to assert a claim against the United States if the agency or
instrumentality does not meet its commitments. Securities in which the Fund may
invest which are not backed by the full faith and credit of the United States
include obligations such as those issued by the Tennessee Valley Authority, the
Federal National Mortgage Association (FNMA), the Federal Home Loan Mortgage
Corporation (FHLMC) and the United States Postal Service, each of which has the
right to borrow from the United States Treasury to meet its obligations, and
obligations of the Federal Farm Credit Bank and the Federal Home Loan Bank, the
obligations of which may only be satisfied by the individual credit of the
issuing agency. GNMA, FNMA and FHLMC investments may include collateralized
mortgage obligations. See "Other Investments and Policies" below.
OBLIGATIONS ISSUED OR GUARANTEED AS TO PRINCIPAL AND INTEREST BY THE UNITED
STATES 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 UNITED STATES TREASURY NOTES OR BONDS. Such notes and bonds are held
in custody by a bank on behalf of the owners. These custodial receipts are
commonly referred to as Treasury strips.
MORTGAGE-RELATED SECURITIES ISSUED BY U.S. GOVERNMENT AGENCIES AND
INSTRUMENTALITIES
THE FUND WILL INVEST IN MORTGAGE-BACKED SECURITIES, INCLUDING THOSE
REPRESENTING AN UNDIVIDED OWNERSHIP INTEREST IN A POOL OF MORTGAGES, E.G., GNMA,
FNMA AND FHLMC CERTIFICATES. The U.S. Government or the issuing agency
guarantees the payment of interest and principal of these securities. However,
the guarantees do not extend to the securities' yield or value, which are likely
to vary inversely with fluctuations in interest rates, nor do the guarantees
extend to the yield or value of the Fund's shares. See "Investment Objective and
Policies--U.S. Government Securities--Mortgage-Related Securities Issued by U.S.
Government Instrumentalities" in the Statement of Additional Information. These
certificates are in most cases "pass-through" instruments, through which the
holder receives a share of all interest and principal payments from the
mortgages underlying the certificate, net of certain fees. 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 obligations.
During periods of declining interest rates, prepayment of mortgages underlying
mortgage-backed securities can be expected to accelerate. The Fund's ability to
maintain a portfolio of high-yielding mortgage-backed securities will be
adversely affected to the extent that prepayments of mortgages must be
reinvested in securities which have lower yields than the prepaid mortgages.
Moreover, prepayments of mortgages which underlie securities purchased at a
premium could result in capital losses.
THE FUND MAY ALSO INVEST IN BALLOON PAYMENT MORTGAGE-BACKED SECURITIES. A
balloon payment mortgage-backed security is an amortizing mortgage security with
installments of principal and interest, the last installment of which is
predominantly principal.
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 INVESTMENTS AND POLICIES
AT LEAST 65% OF THE TOTAL ASSETS OF THE FUND WILL BE INVESTED IN U.S.
GOVERNMENT SECURITIES, AS DESCRIBED ABOVE. U.S. Government securities which are
purchased pursuant to repurchase agreements or on a when-issued or delayed
delivery
9
<PAGE>
basis will be treated as U.S. Government securities for purposes of this
calculation. See "Repurchase Agreements" and "When-Issued and Delayed Delivery
Securities" below.
UP TO 35% OF THE TOTAL ASSETS OF THE FUND MAY BE COMMITTED TO INVESTMENTS
OTHER THAN U.S. GOVERNMENT SECURITIES. These investments would include the
securities described in this subsection as well as purchased put and call
options and purchased put options on futures contracts. See "Options
Transactions" and "Transactions in Futures Contracts on U.S. Government
Securities and Options Thereon" below.
THE FUND IS PERMITTED TO INVEST UP TO 20% OF ITS TOTAL ASSETS IN HIGH QUALITY
MONEY MARKET INSTRUMENTS, INCLUDING COMMERCIAL PAPER OF DOMESTIC CORPORATIONS
AND CERTIFICATES OF DEPOSIT, BANKERS' ACCEPTANCES AND OTHER OBLIGATIONS OF
DOMESTIC AND FOREIGN BANKS. Such obligations will, at the time of purchase, be
rated within the two highest quality grades as determined by a nationally
recognized statistical rating organization (such as Moody's Investors Service
(Moody's) or Standard & Poor's Ratings Group (S&P)) or, if unrated, will be of
equivalent quality in the judgment of the Fund's Subadviser.
THE FUND MAY INVEST IN OBLIGATIONS OF FOREIGN BANKS AND FOREIGN BRANCHES OF
U.S. BANKS ONLY IF AFTER GIVING EFFECT TO SUCH INVESTMENT ALL SUCH INVESTMENTS
WOULD CONSTITUTE LESS THAN 10% OF THE FUND'S TOTAL ASSETS (DETERMINED AT THE
TIME OF INVESTMENT). These investments may be subject to certain risks,
including future political and economic developments, the possible imposition of
withholding taxes on interest income, the seizure or nationalization of foreign
deposits and foreign exchange controls or other restrictions. In addition, there
may be less publicly available information about a foreign bank or foreign
branch of a U.S. bank than about a domestic bank and such entities may not be
subject to the same accounting, auditing and financial recordkeeping standards
and requirements as domestic banks.
THE FUND MAY ALSO PURCHASE OBLIGATIONS OF THE INTERNATIONAL BANK FOR
RECONSTRUCTION AND DEVELOPMENT (THE WORLD BANK). Obligations of the World Bank
are supported by appropriated but unpaid commitments of its member countries,
including the U.S., and there is no assurance these commitments will be
undertaken or met in the future.
THE FUND IS PERMITTED TO INVEST IN ADJUSTABLE RATE DEBT SECURITIES, including
securities issued by U.S. Government agencies, whose interest rate is calculated
by reference to a specified index such as the constant maturity Treasury rate,
the T-bill rate or LIBOR (London Interbank Offered Rate) and is reset
periodically. The value of adjustable rate securities will, like other debt
securities, generally vary inversely with changes in prevailing interest rates.
The value of adjustable rate securities is unlikely to rise in periods of
declining interest rates to the same extent as fixed rate instruments. In
periods of rising interest rates, changes in the coupon will lag behind changes
in the market rate resulting in a lower net asset value until the coupon resets
to market rates.
THE FUND MAY ALSO PURCHASE COLLATERALIZED MORTGAGE OBLIGATIONS (CMOS) AND REAL
ESTATE MORTGAGE INVESTMENT CONDUITS (REMICS). 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 privately-issued CMOs which are collateralized by
mortgage-backed securities issued or guaranteed by GNMA, FHLMC or FNMA or issued
by any other agency or instrumentality of the U.S. Government. The Fund may also
invest in privately-issued CMOs collateralized by whole loans or private
mortgage pass-through securities and balloon payment mortgage-backed securities.
A REMIC may be issued by a trust, partnership, corporation, association, or a
segregated pool of mortgages, or an agency of the U.S. Government and, in each
case, must qualify and elect treatment as such under the Tax Reform Act of 1986.
A REMIC must consist of one or more classes of "regular interests," some of
which may be adjustable rate, and a single class of "residual interests." To
qualify as a REMIC, substantially all the assets of the entity must be in assets
directly or indirectly secured, principally by real property. The Fund does not
intend to invest in residual interests and will only invest in REMICs rated AAA
by S&P or Aaa by Moody's. CMOs and REMICs issued by an agency or instrumentality
of the U.S. Government are considered U.S. Government securities for purposes of
this Prospectus. In reliance on rules and interpretations of the Securities and
Exchange Commission (SEC), the Fund's investments in certain qualifying CMOs and
REMICs are not subject to the limitation of the Investment Company Act on
acquiring interests in other investment companies. See "Investment Objective and
Policies--Collateralized Mortgage Obligations" in the Statement of Additional
Information.
10
<PAGE>
THE FUND MAY ALSO INVEST UP TO 20% OF ITS TOTAL ASSETS IN ASSET-BACKED
SECURITIES. Through the use of trusts and special purpose subsidiaries, various
types of assets, primarily home equity loans and automobile and credit card
receivables, have been securitized in pass-through structures similar to
mortgage pass-through structures or in a pay-through structure similar to the
collateralized mortgage structure. The Fund may invest in these and other types
of asset-backed securities which may be developed in the future. Asset-backed
securities present certain risks that are not presented by mortgage-backed
securities. Primarily, these securities do not have the benefit of the same
security interest in the related collateral. Credit card receivables are
generally unsecured. In connection with automobile receivables, the security
interests in the underlying automobiles are often not transferred when the pool
is created, with the resulting possibility that the collateral could be resold.
In general, these types of loans are of shorter average life than mortgage loans
and are less likely to have substantial prepayments. The Fund will only invest
in asset-backed securities rated at least AA by S&P or Aa by Moody's.
OPTIONS TRANSACTIONS
PURCHASING OPTIONS
THE FUND MAY PURCHASE PUT AND CALL OPTIONS ON U.S. GOVERNMENT SECURITIES. The
Fund may purchase a put option in an effort to protect the value of a security
which it owns against a substantial decline in market value (protective puts),
if the Fund's investment adviser believes that a defensive posture is warranted
for a portion of the portfolio. The Fund may also purchase a put option to cover
a put option it has written or to close an existing option position.
The Fund may wish to protect certain portfolio securities against a decline in
market value at a time when put options on those particular securities are not
available for purchase. The Fund may therefore purchase a put option on
securities other than those it wishes to protect even though it does not hold
such other securities in its portfolio. While changes in the value of the put
option should generally offset changes in the value of the securities being
hedged, the correlation between the two values may not be as close in these
transactions as in transactions in which the Fund purchases a put option on an
underlying security it owns.
THE FUND MAY PURCHASE CALL OPTIONS ON DEBT SECURITIES IT INTENDS TO ACQUIRE IN
ORDER TO HEDGE AGAINST AN ANTICIPATED MARKET APPRECIATION IN THE PRICE OF THE
UNDERLYING SECURITIES AT LIMITED RISK AND WITH A LIMITED CASH OUTLAY. If the
market price does rise as anticipated, the Fund will benefit from that rise but
only to the extent that the rise exceeds the premiums paid. If the anticipated
rise does not occur or if it does not exceed the premium, the Fund will bear the
expense of the option premiums and transaction costs without gaining an
offsetting benefit. The Fund may also purchase a call option to close an
existing option position.
WRITING COVERED OPTIONS
THE FUND MAY WRITE (I.E., SELL) COVERED PUT AND CALL OPTIONS ON U.S.
GOVERNMENT SECURITIES. When the Fund writes an option, it receives a premium
which it retains whether or not the option is exercised. The Fund's principal
reason for writing options is to realize, through the receipt of premiums, a
greater current return than would be realized on the underlying securities
alone.
THE PURCHASER OF A CALL OPTION HAS THE RIGHT, FOR A SPECIFIED PERIOD OF TIME,
TO PURCHASE THE SECURITIES SUBJECT TO THE OPTION AT A SPECIFIED PRICE (THE
EXERCISE PRICE). By writing a call option, the Fund becomes obligated during the
term of the option, upon exercise of the option, to sell the underlying
securities to the purchaser against receipt of the exercise price. When the Fund
writes a call option, the Fund loses the potential for gain on the underlying
securities during the period that the option is open.
CONVERSELY, THE PURCHASER OF A PUT OPTION HAS THE RIGHT, FOR A SPECIFIED
PERIOD OF TIME, TO SELL THE SECURITIES SUBJECT TO THE OPTION TO THE WRITER OF
THE PUT AT A SPECIFIED EXERCISE PRICE. By writing a put option, the Fund becomes
obligated during the term of the option to purchase the securities underlying
the option at the exercise price, upon exercise of the option. The Fund might,
therefore, be obligated to purchase the underlying securities for more than
their current market price.
THE FUND MAY ALSO WRITE STRADDLES (I.E., A COMBINATION OF A CALL AND A PUT
WRITTEN ON THE SAME SECURITY AT THE SAME STRIKE PRICE WHERE THE SAME ISSUE OF
THE SECURITY IS CONSIDERED "COVER" FOR BOTH THE PUT AND THE CALL). In such
cases, the
11
<PAGE>
Fund will also segregate or deposit cash, U.S. Government securities or liquid
high-grade debt obligations equivalent to the amount, if any, by which the put
is "in the money." It is contemplated that the Fund's use of straddles will be
limited to 5% of the Fund's net assets (meaning that the securities used for
cover or segregated as described above will not exceed 5% of the Fund's net
assets at the time the straddle is written).
An exchange-traded option position may be closed out only on an exchange which
provides a secondary market for an option of the same series. Although the Fund
will generally purchase or write only those exchange-traded options for which
there appears to be an active secondary market, there is no assurance that a
liquid secondary market on an exchange will exist for any particular option at
any particular time. If a secondary market does not exist, it might not be
possible to effect a closing transaction in a particular option. If the Fund, as
a covered call option writer, is unable to effect a closing purchase
transaction, it will not be able to sell the underlying securities until the
option expires or is exercised or it otherwise covers the position.
The Fund will not purchase a put or call option on U.S. Government securities
if, as a result of such purchase, more than 20% of its total assets would be
invested in premiums for such options and on options on futures contracts on
U.S. Government securities. The Fund's ability to purchase put and call options
may be limited by the Internal Revenue Code's requirements for qualification as
a regulated investment company. See "Taxes, Dividends and Distributions--Listed
Options and Futures" in the Statement of Additional Information.
OTHER CONSIDERATIONS
ALL OPTIONS PURCHASED OR SOLD BY THE FUND WILL BE TRADED ON A U.S. SECURITIES
EXCHANGE OR WILL BE PURCHASED OR SOLD BY A PRIMARY GOVERNMENT SECURITIES DEALER
RECOGNIZED BY THE FEDERAL RESERVE BANK OF NEW YORK (OTC OPTIONS). While
exchange-traded options are in effect guaranteed by The Options Clearing
Corporation, the Fund relies on the dealer from whom it purchases an OTC option
to perform if the option is exercised. The Fund's investment adviser monitors
the creditworthiness of dealers with whom the Fund enters into OTC option
transactions under the general supervision of the Fund's Board of Directors. The
Fund's ability to enter into options contracts may be limited by the
requirements of the Internal Revenue Code of 1986, as amended (the Internal
Revenue Code) for qualification as a regulated investment company. See the
Statement of Additional Information for additional information on options
transactions.
TRANSACTIONS IN FUTURES CONTRACTS ON U.S. GOVERNMENT SECURITIES AND OPTIONS
THEREON
THE FUND MAY PURCHASE AND SELL FUTURES CONTRACTS ON U.S. GOVERNMENT SECURITIES
(FUTURES CONTRACTS) THAT ARE TRADED ON U.S. COMMODITY EXCHANGES. A futures
contract on a U.S. Government security, other than GNMA's which are cash
settled, is an agreement to purchase or sell an agreed amount of such securities
at a set price for delivery on an agreed future date. The Fund may purchase a
futures contract as a hedge against an anticipated decline in interest rates,
and resulting increase in market price, in securities the Fund intends to
acquire. The Fund may sell a futures contract as a hedge against an anticipated
increase in interest rates, and resulting decline in market price, in securities
the Fund owns.
THE FUND MAY ALSO PURCHASE AND WRITE (I.E., SELL) "COVERED" CALL AND PUT
OPTIONS ON FUTURES CONTRACTS ON U.S. GOVERNMENT SECURITIES THAT ARE TRADED ON
U.S. COMMODITY EXCHANGES. THE FUND WILL WRITE OPTIONS ON FUTURES CONTRACTS FOR
HEDGING PURPOSES, AS WELL AS TO REALIZE THROUGH THE RECEIPT OF PREMIUM INCOME, A
GREATER RETURN THAN WOULD BE REALIZED ON THE FUND'S PORTFOLIO SECURITIES ALONE.
An option on a futures contract gives the purchaser the right, in return for the
premium paid, to assume a position in a futures contract (a long position if the
option is a call and a short position if the option is a put) at a specified
exercise price at any time during the option exercise period. The writer of the
option is required upon exercise to assume an offsetting futures position (a
short position if the option is a call and a long position if the option is a
put). Upon exercise of the option, the assumption of offsetting futures
positions by the writer and holder of the option will be accompanied by delivery
of the accumulated cash balance in the writer's futures margin account which
represents the amount by which the market price of the futures contract, at
exercise, exceeds, in the case of a call, or is less than, in the case of a put,
the exercise price of the option on the futures contract.
THE FUND MAY ALSO FROM TIME TO TIME PURCHASE EURODOLLAR INSTRUMENTS TRADED ON
THE CHICAGO MERCANTILE EXCHANGE. Eurodollar instruments are essentially U.S.
dollar-denominated futures contracts or options thereon which are linked
12
<PAGE>
to the London Interbank Offered Rate (LIBOR). Eurodollar futures contracts
enable purchasers to obtain a fixed rate for the lending of funds and sellers to
obtain a fixed rate for borrowings. The Fund intends to use Eurodollar futures
contracts and options thereon to hedge against changes in LIBOR, to which many
interest rate swaps are linked. The use of these instruments is subject to the
same limitations and risks as those applicable to the use of interest rate
futures contracts and options thereon.
THE FUND MAY ALSO ENTER INTO CLOSING TRANSACTIONS WITH RESPECT TO FUTURES
CONTRACTS AND OPTIONS THEREON TO TERMINATE EXISTING POSITIONS. The Fund's
ability to enter into transactions in futures contracts and options thereon may
be limited by the Internal Revenue Code's requirements for qualification as a
regulated investment company. In addition, the Fund may not purchase or sell
futures contracts or related options for other than bona fide hedging purposes
if immediately thereafter the sum of the amount of initial margin deposits on
the Fund's existing futures and options on futures and for premiums paid for
such related options would exceed 5% of the liquidation value of the Fund's
total assets, after taking into account unrealized profits and unrealized losses
on any such contracts the Fund has entered into; provided, however, that in the
case of an option that is in-the-money at the time of purchase, the in-the-money
amount may be excluded in computing such 5% limitation.
CHARACTERISTICS AND PURPOSES OF INTEREST RATE FUTURES
THE FUND WILL PURCHASE AND SELL FUTURES CONTRACTS PRIMARILY TO HEDGE ITS
ACTUAL OR ANTICIPATED HOLDINGS OF U.S. GOVERNMENT SECURITIES. There is generally
an inverse relationship between interest rates and bond prices. Generally, when
interest rates increase, bond prices will decline; when interest rates decline,
bond prices will increase. For example, if the Fund holds cash reserves or
short-term debt securities at a time that interest rates are expected to
decline, the Fund might purchase futures contracts as a hedge against
anticipated increases in the price of the U.S. Government securities that the
Fund intends to acquire (an anticipatory hedge).
CHARACTERISTICS AND PURPOSES OF OPTIONS ON FUTURES CONTRACTS ON U.S.
GOVERNMENT SECURITIES
When an option on a futures contract is exercised, the writer of the option
delivers the futures position as well as the accumulated balance in the writer's
futures margin account, which represents the amount by which the market price of
the futures contract, at exercise, exceeds, in the case of a call, or is less
than, in the case of a put, the exercise price of the option on the futures
contract. The Fund will be required to deposit initial and variation margin with
respect to options on futures contracts written by it.
The Fund will purchase put options on futures contracts primarily to hedge its
portfolio of U.S. Government 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 purchase call options on futures contracts to hedge the
Fund's portfolio against a possible market advance at a time when the Fund is
not fully invested in U.S. Government securities (other than Treasury Bills).
The Fund also will write call options on futures contracts as a hedge against
a modest decline in prices of debt securities held in the Fund's portfolio and
to earn additional income. If the futures price at expiration of the 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
securities in the Fund's portfolio which were being hedged.
Writing a put option on a futures contract serves as a partial hedge against
an increase in the value of debt securities the Fund intends to acquire. If the
futures price at expiration of the option is above the exercise price, the Fund
will retain the full amount of the option premium thereby partially hedging
against any increase that may have occurred in the price of the debt securities
the Fund intends to acquire. If the futures price when the option is exercised
is below the exercise price, however, the Fund will incur a loss, which may be
wholly or partially offset by the decrease of the price of the securities the
Fund intends to acquire. The Fund will also write options on futures contracts
in whole or in part to enhance its current return through the receipt of premium
income.
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See "Investment Objective and Policies--Futures Contracts on U.S. Government
Securities" in the Statement of Additional Information.
RISK CONSIDERATIONS
CERTAIN RISKS ARE INHERENT IN THE FUND'S USE OF FUTURES CONTRACTS AND OPTIONS
ON FUTURES. One such risk arises because the correlation between movements in
the price of futures and movements in the price of debt securities that are the
subject of the hedge will not be perfect. Another risk is that the movements in
the price of futures or options on futures may not move inversely with changes
in interest rates. If the Fund has sold futures contracts to hedge securities
held by the Fund and the value of the futures position declines more than the
price of such securities increases, the Fund will realize a loss on the futures
contracts which is not completely offset by the appreciation in the price of the
hedged securities. Similarly, if the Fund has written a call on a futures
contract and the value of the call increases by more than the increase in the
value of the securities held as cover, the Fund may realize a loss on the call
which is not completely offset by the appreciation in the price of the
securities held as cover and the premium received for writing the call.
REPURCHASE AGREEMENTS
The Fund may on occasion enter into repurchase agreements, whereby the seller
agrees to repurchase a security from the Fund at a mutually agreed-upon time and
price. The repurchase date is usually within a day or two of the original
purchase date although it may extend over a number of months. The resale price
is in excess of the purchase price, reflecting an agreed-upon rate of return
effective for the period of time the Fund's money is invested in the security.
The Fund's repurchase agreements will at all times be fully collateralized in an
amount at least equal to the purchase price including accrued interest earned on
the underlying securities. The instruments held as collateral are valued daily,
and if the value of instruments declines, the Fund will require additional
collateral. If the seller defaults and the value of the collateral securing the
repurchase agreement declines, the Fund may incur a loss. The Fund participates
in a joint repurchase account with other investment companies managed by
Prudential Mutual Fund Management, Inc. pursuant to an order of the SEC. See
"Investment Objective and Policies--Repurchase Agreements" in the Statement of
Additional Information.
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. As a matter of fundamental policy, the Fund cannot
lend more than 30% of the value of its total assets.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES
The Fund may purchase or sell U.S. Government 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 as much as a month or more 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 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.
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OTHER INVESTMENT INFORMATION
The Fund is permitted to use the following investment techniques, although it
does not anticipate that any of them will constitute a significant component of
its investment program.
ZERO COUPON BONDS
The Fund may invest up to 5% of its total assets in zero coupon U.S.
Government securities. Zero coupon bonds are purchased at a discount from the
face amount because the buyer receives only the right to receive a fixed payment
on a certain date in the future and does not receive any periodic interest
payments. The effect of owning instruments which do not make current interest
payments is that a fixed yield is earned not only on the original investment but
also, in effect, on all discount accretion during the life of the obligations.
This implicit reinvestment of earnings at the same rate eliminates the risk of
being unable to reinvest distributions at a rate as high as the implicit yield
on the zero coupon bond, but at the same time eliminates the holder's ability to
reinvest at higher rates in the future. For this reason, zero coupon bonds are
subject to substantially greater price fluctuations during periods of changing
market interest rates than are comparable securities which pay interest
currently, which fluctuation increases the longer the period to maturity.
SHORT SALES AGAINST-THE-BOX
The Fund may make short sales against-the-box for the purpose of deferring
realization of gain or loss for federal income tax purposes. A short sale
"against-the-box" is a short sale in which the Fund owns an equal amount of the
securities sold short or securities convertible into or exchangeable, without
payment of any further consideration, for securities of the same issue as, and
equal in amount to, the securities sold short. The Fund may engage in such short
sales only to the extent that not more than 10% of the Fund's net assets
(determined at the time of the short sale) are held as collateral for such
sales.
BORROWING
The Fund may borrow money in an amount up to 20% of the value of its total
assets (not including the amount of such borrowings) 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.
ILLIQUID SECURITIES
The Fund may invest up to 15% of its net assets in illiquid securities
including repurchase agreements which have a maturity of longer than seven days,
securities with legal or contractual restrictions on resale (restricted
securities) and other securities that are not readily marketable. Restricted
securities eligible for resale pursuant to Rule 144A under the Securities Act of
1933, as amended (the Securities Act), and privately placed commercial paper
that have a readily available market are not considered illiquid for purposes of
this limitation. The Fund intends to comply with any applicable state blue sky
laws restricting the Fund's investments in illiquid securities. See "Investment
Restrictions" in the Statement of Additional Information. 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 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 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."
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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.
DOLLAR ROLLS
The Fund may enter into dollar rolls in which the Fund sells securities for
delivery in the current month and simultaneously contracts to repurchase
substantially similar (same type and coupon) securities on a specified future
date from the same party. During the roll period, the Fund forgoes principal and
interest paid on the securities. The Fund is compensated by the difference
between the current sales price and the forward price for the future purchase
(often referred to as the "drop") as well as by the interest earned on the cash
proceeds of the initial sale.
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 to dollar rolls. Dollar
rolls involve the risk that the market value of the securities retained by the
Fund may decline below the price of the securities the Fund has sold but is
obligated to repurchase under the agreement. In the event the buyer of
securities under a dollar roll files for bankruptcy or becomes insolvent, the
Fund's use of the proceeds of the agreement may be restricted pending a
determination by the other party, or its trustee or receiver, whether to enforce
the Fund's obligation to repurchase the securities. Dollar rolls are considered
borrowings by the Fund for purposes of the percentage limitations applicable to
borrowings.
INTEREST RATE TRANSACTIONS
The Fund may enter into interest rate swaps. Interest rate swaps involve the
exchange by the Fund with another party of their respective commitments to pay
or receive interest, 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. See "Investment
Objective and Policies--Interest Rate Transactions" in the Statement of
Additional Information.
PORTFOLIO TURNOVER AND BROKERAGE
Based on its experience in managing similar investment products, the
investment adviser expects that, under normal circumstances, if the Fund writes
substantial numbers of options, and those options are exercised, the Fund's
portfolio turnover rate may be as high as 250% or higher. Such a rate would
significantly exceed that of a fund invested exclusively in U.S. Government
securities. See "Investment Objective and Policies--Options Transactions" in the
Statement of Additional Information. 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" in the Statement of Additional Information.
INVESTMENT RESTRICTIONS
The Fund is subject to certain investment restrictions which, like its
investment objective, constitute fundamental policies. Fundamental policies
cannot be changed without the approval of the holders of a majority of the
Fund's outstanding voting securities, as defined in the Investment Company Act.
See "Investment Restrictions" in the Statement of Additional Information.
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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 February 28, 1995, the total expenses as a
percentage of average net assets for the Fund's Class A, Class B and Class C
shares were 0.98%, 1.66% and 1.63% (annualized), respectively. See "Financial
Highlights."
MANAGER
PRUDENTIAL MUTUAL FUND MANAGEMENT, INC. (PMF OR THE MANAGER), ONE SEAPORT
PLAZA, NEW YORK, NEW YORK 10292, IS THE MANAGER OF THE FUND AND IS COMPENSATED
FOR ITS SERVICES AT AN ANNUAL RATE OF .50 OF 1% OF THE FUND'S AVERAGE DAILY NET
ASSETS UP TO $3 BILLION AND .35 OF 1% OF THE AVERAGE DAILY NET ASSETS IN EXCESS
OF $3 BILLION. It was incorporated in May 1987 under the laws of the State of
Delaware. For the fiscal year ended February 28, 1995, the Fund paid management
fees to PMF of .50% of the Fund's average daily net assets. See "Manager" in the
Statement of Additional Information.
As of March 31, 1995, PMF served as the manager to 39 open-end investment
companies, constituting all of the Prudential Mutual Funds, and as manager or
administrator to 29 closed-end investment companies with aggregate assets of
approximately $46 billion.
UNDER THE MANAGEMENT AGREEMENT WITH THE FUND, PMF MANAGES THE INVESTMENT
OPERATIONS OF THE FUND AND ALSO ADMINISTERS THE FUND'S CORPORATE AFFAIRS. See
"Manager" in the Statement of Additional Information.
UNDER THE SUBADVISORY AGREEMENT BETWEEN PMF AND THE PRUDENTIAL INVESTMENT
CORPORATION (PIC OR THE SUBADVISER), PIC FURNISHES INVESTMENT ADVISORY SERVICES
IN CONNECTION WITH THE MANAGEMENT OF THE FUND AND IS REIMBURSED BY PMF FOR ITS
REASONABLE COSTS AND EXPENSES INCURRED IN PROVIDING SUCH SERVICES. Under the
Management Agreement, PMF continues to have responsibility for all investment
advisory services and supervises PIC's performance of such services.
The current portfolio manager of the Fund is Barbara L. Kenworthy, a managing
director and senior portfolio manager of
Prudential Investment Advisors, a unit of PIC. Ms. Kenworthy has responsibility
for the day to day management of the Fund's portfolio and has managed the Fund's
portfolio since July 1994. Ms. Kenworthy was previously employed by The Dreyfus
Corporation (from June 1985 to June 1994) and served as president and portfolio
manager for several Dreyfus fixed-income funds.
PMF and PIC are 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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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
representatives of 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
ACTIVITIES WITH RESPECT TO CLASS A SHARES AT AN ANNUAL RATE OF UP TO .30 OF 1%
OF THE AVERAGE DAILY NET ASSETS OF THE CLASS A SHARES. The Class A Plan provides
that (i) up to .25 of 1% of the average daily net assets of the Class A shares
may be used to pay for personal service and/ or the maintenance of shareholder
accounts (service fee) and (ii) total distribution fees (including the service
fee of up to .25 of 1%) may not exceed .30 of 1% of the average daily net assets
of the Class A shares. PMFD has agreed to limit its distribution-related fees
payable under the Class A Plan to .15 of 1% of the average daily net assets of
the Class A shares for the fiscal year ending February 28, 1996.
UNDER THE CLASS B PLAN, THE FUND MAY PAY PRUDENTIAL SECURITIES FOR ITS
DISTRIBUTION-RELATED ACTIVITIES WITH RESPECT TO CLASS B SHARES AT AN ANNUAL RATE
OF UP TO 1% OF THE AVERAGE DAILY NET ASSETS OF THE CLASS B SHARES UP TO $3
BILLION, .80 OF 1% OF THE NEXT $1 BILLION OF SUCH NET ASSETS AND .50 OF 1% OF
SUCH NET ASSETS IN EXCESS OF $4 BILLION. The Class B Plan provides for the
payment to Prudential Securities of (i) an asset-based sales charge of up to .75
of 1% of the average daily net assets of the Class B shares up to $3 billion,
.55 of 1% of the next $1 billion of such net assets and .25 of 1% of such net
assets in excess of $4 billion, and (ii) a service fee of up to .25 of 1% of the
average daily net assets of the Class B shares. UNDER THE CLASS C PLAN, THE FUND
PAYS PRUDENTIAL SECURITIES FOR ITS DISTRIBUTION-RELATED EXPENSES WITH RESPECT TO
THE CLASS C SHARES AT AN ANNUAL RATE OF UP TO 1% OF AVERAGE DAILY NET ASSETS OF
CLASS C SHARES. The Class C Plan provides for the payment to Prudential
Securities of (i) an asset-based sales charge of up to .75 of 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 B Plan to .825 of 1% of the average daily net assets of the
Class B shares and 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 February 28, 1996.
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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The Fund records all payments made under the Plans as expenses in the
calculation of net investment income. Prior to August 1, 1994, the Class A and
Class B Plans operated as "reimbursement type" plans and, in the case of Class
B, provided for the reimbursement of distribution expenses incurred in current
and prior years. See "Distributor" in the Statement of Additional Information.
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 distribution and service fees incurred under any plan if it is
terminated or not continued.
In addition to distribution and service fees paid by the Fund under the Class
A, Class B and Class C Plans, the Manager (or one of its affiliates) may make
payments out of its own resources to dealers and other persons who distribute
shares of the Fund. Such payments may be calculated by reference to the net
asset value of shares sold by such persons or otherwise.
The Distributor is subject to the rules of the National Association of
Securities Dealers, Inc. (the NASD) governing maximum sales charges. See
"Distributor" in the Statement of Additional Information.
On October 21, 1993, PSI entered into an omnibus settlement with the SEC,
state securities regulators (with the exception of the Texas Securities
Commissioner who joined the settlement on January 18, 1994) and the NASD to
resolve allegations that from 1980 through 1990 PSI sold certain limited
partnership interests in violation of securities laws to persons for whom such
securities were not suitable and misrepresented the safety, potential returns
and liquidity of these investments. Without admitting or denying the allegations
asserted against it, PSI consented to the entry of an SEC Administrative Order
which stated that PSI's conduct violated the federal securities laws, directed
PSI to cease and desist from violating the federal securities laws, pay civil
penalties, and adopt certain remedial measures to address the violations.
Pursuant to the terms of the SEC settlement, PSI agreed to the imposition of a
$10,000,000 civil penalty, established a settlement fund in the amount of
$330,000,000 and procedures to resolve legitimate claims for ocmpensatory
damages by purchasers of the partnership interests. PSI has agreed to provide
additional funds, if necessary, for the purpose of the settlement fund. PSI's
settlement with the state securities regulators included an agreement to pay a
penalty of $500,000 per jurisdiction. PSI consented to a censure and to the
payment of a $5,000,000 fine in settling the NASD action.
In October 1994, a criminal complaint was filed with the United States
Magistrate for the Southern District of New York alleging that PSI committed
fraud in connection with the sale of certain limited partnership interests in
violation of federal securities laws. An agreement was simultaneously filed to
defer prosecution of these charges for a period of three years from the signing
of the agreement, provided that PSI complies with the terms of the agreement.
If, upon completion of the three year period, PSI has complied with the terms of
the agreement, no prosecution will be instituted by the United States for the
offenses charged in the
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complaint. If on the other hand, during the course of the three year period, PSI
violates the terms of the agreement, the U.S. Attorney can then elect to pursue
these charges. Under the terms of the agreement, PSI agreed, among other things,
to pay an additional $330,000,000 into the fund established by the SEC to pay
restitution to investors who purchased certain PSI limited partnership
interests.
For more detailed information concerning the foregoing matters, see
"Distributor" in the Statement of Additional Information, a copy of which may be
obtained at no cost by calling 1-800-225-1852.
The Fund is not affected by PSI's financial condition and is an entirely
separate legal entity from PSI, which has no beneficial ownership therein and
the Fund's assets which are held by State Street Bank and Trust Company, an
independent custodian, are separate and distinct from PSI.
PORTFOLIO TRANSACTIONS
Prudential Securities may act as a broker and/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. Its mailing
address is P .O. Box 15005, New Brunswick, New Jersey 08906-5005. PMFS is a
wholly-owned subsidiary of PMF.
HOW THE FUND VALUES ITS SHARES
THE FUND'S NET ASSET VALUE PER SHARE OR NAV IS DETERMINED BY SUBTRACTING ITS
LIABILITIES FROM THE VALUE OF ITS ASSETS AND DIVIDING THE REMAINDER BY THE
NUMBER OF OUTSTANDING SHARES OF THE FUND. NAV IS CALCULATED SEPARATELY FOR EACH
CLASS. THE BOARD OF DIRECTORS HAS FIXED THE SPECIFIC TIME OF DAY FOR THE
COMPUTATION OF THE FUND'S NAV TO BE AS OF 4:15 P .M., NEW YORK TIME.
Portfolio securities are valued based on market quotations or, if not readily
available, at fair value as determined in good faith under procedures
established by the Fund's Board of Directors. See "Net Asset Value" in the
Statement of Additional Information.
The Fund will compute its NAV once daily on days that the New York Stock
Exchange is open for trading except on days on which no orders to purchase, sell
or redeem shares have been received by the Fund or days on which changes in the
value of the Fund's portfolio securities do not materially affect the NAV. The
New York Stock Exchange is closed on the following holidays: 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 NAVs and
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, if any, will differ by approximately the amount of the
distribution-related expense accrual differential among the classes.
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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
"total return" shows how much an investment in the Fund would have increased
(decreased) over a specified period of time (I.E., one, five or ten years or
since inception of the Fund) assuming that all distributions and dividends by
the Fund were reinvested on the reinvestment dates during the period and less
all recurring fees. The "aggregate" total return reflects actual performance
over a stated period of time. "Average annual" total return is a hypothetical
rate of return that, if achieved annually, would have produced the same
aggregate total return if performance had been constant over the entire period.
"Average annual" total return smooths out variations in performance and takes
into account any applicable initial or contingent deferred sales charges.
Neither "average annual" total return nor "aggregate" total return takes into
account any federal or state income taxes which may be payable upon redemption.
The "yield" refers to the income generated by an investment in the Fund over a
one-month or 30-day period. This income is then "annualized" that is, the amount
of income generated by the investment during that 30-day period is assumed to be
generated each 30-day period for twelve periods and is shown as a percentage of
the investment. The income earned on the investment is also assumed to be
reinvested at the end of the sixth 30-day period. The Fund also may include
comparative performance information in advertising or marketing the Fund's
shares. Such performance information may include data from Lipper Analytical
Services, Inc., Morningstar Publications, Inc., other industry publications,
business periodicals and market indices. See "Performance Information" in the
Statement of Additional Information. The Fund will include performance data for
each class of shares of the Fund in any advertisement or information which
includes 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. ACCORDINGLY, THE FUND WILL
NOT BE SUBJECT TO FEDERAL INCOME TAXES ON ITS NET INVESTMENT INCOME AND CAPITAL
GAINS, IF ANY, THAT IT DISTRIBUTES TO ITS SHAREHOLDERS. See "Taxes, Dividends
and Distributions" in the Statement of Additional Information.
TAXATION OF SHAREHOLDERS
All dividends out of net investment income, together with distributions of
short-term capital gains, will be taxable as ordinary income to the shareholder
whether or not reinvested. Any net long-term capital gains (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.
21
<PAGE>
The Fund has obtained opinions of counsel to the effect that neither (i) the
conversion of Class B shares into Class A shares nor (ii) the exchange of Class
B or Class C shares for Class A shares constitutes a taxable event for federal
income tax purposes. However, such opinions are 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, Dividends and
Distributions" in the Statement of Additional Information.
WITHHOLDING TAXES
Under the Internal Revenue Code, the Fund is required to withhold and remit to
the U.S. Treasury 31% of dividends, capital gain income and redemption proceeds
payable to individuals and certain noncorporate shareholders who fail to furnish
correct tax identification numbers on IRS Form W-9 (or IRS Form W-8 in the case
of certain foreign shareholders) with the required certifications regarding the
shareholder's status under federal income tax law. Notwithstanding the
foregoing, dividends of net investment income and short-term capital gains to a
foreign shareholder will generally be subject to U.S. withholding tax at the
rate of 30% (or lower treaty rate).
DIVIDENDS AND DISTRIBUTIONS
THE FUND EXPECTS TO DECLARE DAILY AND PAY MONTHLY DIVIDENDS OF NET INVESTMENT
INCOME, IF ANY, AND MAKE DISTRIBUTIONS AT LEAST ANNUALLY OF ANY NET CAPITAL
GAINS. In determining the amount of capital gains to be distributed, the amount
of any capital loss carryforwards from prior years will be offset against
capital gains. As of February 28, 1995, the Fund had a capital loss carryforward
for federal income tax purposes of approximately $140,517,000. Accordingly, no
capital gains distribution is expected to be paid to shareholders until net
gains have been realized in excess of such carryforwards. 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
charges, 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."
Shares will begin earning daily dividends on the day following the date on
which the shares are issued, the date of issuance customarily being the
"settlement" date. Shares continue to earn daily dividends until they are
redeemed. In the event an investor redeems all the shares in his or her account
at any time during the month, all daily dividends declared to the date of
redemption will be paid at the time of redemption.
DIVIDENDS AND DISTRIBUTIONS WILL BE PAID IN ADDITIONAL FUND SHARES, BASED ON
THE NAV OF EACH CLASS ON THE PAYMENT AND RECORD DATE, RESPECTIVELY, 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 PAYMENT DATE TO
RECEIVE SUCH DIVIDENDS AND DISTRIBUTIONS IN CASH. Such election should be
submitted to Prudential Mutual Fund Services, Inc., Attention: Account
Maintenance, P .O. Box 15015, New Brunswick, New Jersey 08906-5015. 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. 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. Any distributions paid shortly after a purchase by an investor will have
the effect of reducing the per share net asset value of the investor's shares by
the per share amount of the distributions. Such distributions, although in
effect a return of invested principal, are subject to federal income taxes.
Accordingly, prior to purchasing shares of the Fund, an investor should
carefully consider the impact of capital gains distributions which are expected
to be or have been announced. If you hold shares through Prudential Securities
you should contact your financial adviser to elect to receive dividends and
distributions in cash.
22
<PAGE>
WHEN THE FUND GOES "EX-DIVIDEND," ITS NAV IS REDUCED BY THE AMOUNT OF THE
DIVIDEND OR DISTRIBUTION. 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 DISTRIBUTION. YOU SHOULD,
THEREFORE, CONSIDER THE TIMING OF DIVIDENDS AND DISTRIBUTIONS WHEN MAKING YOUR
PURCHASES.
GENERAL INFORMATION
DESCRIPTION OF COMMON STOCK
THE FUND WAS INCORPORATED IN MARYLAND ON APRIL 8, 1983. THE FUND IS AUTHORIZED
TO ISSUE TWO BILLION 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 666,666,666 2/3 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 as 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 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.
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.
23
<PAGE>
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), ATTENTION: INVESTMENT SERVICES,
P.O. BOX 15020, NEW BRUNSWICK, NEW JERSEY 08906-5020. 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 is $50. The minimum initial investment requirement is
waived for purchases of Class A shares effected through an exchange of Class B
shares of The BlackRock Government Income Trust. See "Shareholder Services."
THE PURCHASE PRICE IS THE NAV NEXT DETERMINED FOLLOWING RECEIPT OF AN ORDER BY
THE TRANSFER AGENT OR PRUDENTIAL SECURITIES PLUS A SALES CHARGE WHICH, AT YOUR
OPTION, MAY BE IMPOSED 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 into the Fund) or to suspend or modify the continuous offering of its
shares. See "How to Sell Your Shares."
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
Government Income 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 the
calculation of NAV (4:15 P .M., New York time), on a business day, you may
purchase shares of the Fund as of that day. See "Net Asset Value" in the
Statement of Additional Information.
In making a subsequent purchase order by wire, you should wire State Street
directly and should be sure that the wire specifies Prudential Government Income
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.
24
<PAGE>
ALTERNATIVE PURCHASE PLAN
THE FUND OFFERS THREE CLASSES OF SHARES (CLASS A, CLASS B AND CLASS C) 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 1% (Currently being Shares convert to Class A shares
charge or CDSC of 5% of the lesser of charged at a rate of approximately seven years after
the amount invested or the redemption .825 of 1%) 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) that Class B shares automatically convert to Class A
shares approximately seven years after purchase (see "Conversion Feature--Class
B Shares" below).
The following is provided to assist you in determining which method of
purchase best suits your individual circumstances and is based on current fees
and expenses being charged to the Fund:
If you intend to hold your investment in the Fund for less than 7 years and do
not qualify for a reduced sales charge on Class A shares, since Class A shares
are subject to a maximum initial sales charge of 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 7 years or more and do not qualify
for a reduced sales charge on Class A shares, since Class B shares convert to
Class A shares approximately 7 years after purchase and because all of your
money would be invested initially in the case of Class B shares, you should
consider purchasing Class B shares over either Class A or Class C shares.
25
<PAGE>
If you qualify for a reduced sales charge on Class A shares, it may be more
advantageous for you to purchase Class A shares over either Class B or Class C
shares regardless of how long you intend to hold your investment. However,
unlike Class B and Class C shares, you would not have all of your money invested
initially because the sales charge on Class A shares is deducted at the time of
purchase.
If you do not qualify for a reduced sales charge on Class A shares and you
purchase Class B or Class C shares, you would have to hold your investment for
more than 5 years in the case of Class B shares and 6 years in the case of 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
UNDER RIGHTS OF ACCUMULATION OR LETTERS OF INTENT, MUST BE FOR CLASS A SHARES.
See "Reduction and 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 SALES CHARGE DEALER
AS PERCENTAGE AS PERCENTAGE CONCESSION AS
OF OFFERING OF AMOUNT PERCENTAGE OF
AMOUNT OF PURCHASE PRICE INVESTED OFFERING PRICE
- ------------------------- -------------- -------------- ----------------
<S> <C> <C> <C>
$0 to $49,999 4.00% 4.17% 3.75%
$50,000 to $99,999 3.50 3.83 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 None 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 "Purchase and Redemption of Fund
Shares--Reduction and Waiver of Initial Sales Charges--Class A shares" in the
Statement of Additional Information.
BENEFIT PLANS. Class A shares may be purchased at NAV, without payment of an
initial sales charge, by pension, profit-sharing or other employee benefit plans
qualified under Section 401 of the Internal Revenue Code and deferred
compensation and annuity plans under Sections 457 and 403(b)(7) of the Internal
Revenue Code (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 participants. In the case of Benefit Plans whose
accounts are held directly with the Transfer Agent or Prudential Securities and
for which the Transfer Agent or Prudential Securities does individual account
recordkeeping (Direct Account Benefit Plans) and Benefit Plans sponsored by 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. After a Benefit Plan qualifies to purchase Class A
shares at NAV, all subsequent purchases will be made at NAV.
PRUDENTIAL VISTA PROGRAM. Class A shares are offered at net asset value to
certain qualified employee retirement benefit plans under Section 401 of the
Internal Revenue Code, for which Prudential Defined Contribution Services serves
as the recordkeeper provided that such plan is also participating in the
Prudential Vista Program (PruVista Plan), and provided further that (i) for
26
<PAGE>
existing plans, the plan has existing assets of at least $1 million and at least
100 eligible employees or participants, and (ii) for new plans, the plan has at
least 500 eligible employees or participants. The term "existing assets" for
this purpose includes transferable cash and GICs (guaranteed investment
contracts) maturing within 4 years. After a PruVista Plan qualifies to purchase
Class A shares at NAV, all subsequent purchases will be made at NAV.
OTHER WAIVERS. In addition, Class A shares may be purchased at NAV, through
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 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 commencement of the financial adviser's employment at Prudential
Securities, (ii) the purchase is made with proceeds of a redemption of shares of
any open-end, non-money market fund sponsored by the financial adviser's
previous employer (other than a fund which imposes a distribution or service fee
of .25 of 1% or less) and (iii) the financial adviser served as the client's
broker on the previous purchase.
You must notify the Fund's Transfer Agent either directly or through
Prudential Securities or Prusec at the time of purchase that you are entitled to
a 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 acquired upon the reinvestment of dividends and
distributions. See "Purchase and Redemption of Fund Shares--Reduction and Waiver
of Initial Sales Charge--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."
HOW TO SELL YOUR SHARES
YOU CAN REDEEM YOUR SHARES OF THE FUND AT ANY TIME AT THE NAV NEXT DETERMINED
AFTER THE REDEMPTION REQUEST IS RECEIVED IN PROPER FORM BY THE TRANSFER AGENT OR
PRUDENTIAL SECURITIES. SEE "HOW THE FUND VALUES ITS SHARES." In certain cases,
however, redemption proceeds will be reduced by the amount of any applicable
contingent deferred sales charge, as described below. See "Contingent Deferred
Sales Charges--Class B Shares."
IF YOU HOLD SHARES OF THE FUND THROUGH PRUDENTIAL SECURITIES, YOU MUST REDEEM
YOUR SHARES BY CONTACTING YOUR PRUDENTIAL SECURITIES FINANCIAL ADVISER. IF YOU
HOLD SHARES IN NON-CERTIFICATE FORM, A WRITTEN REQUEST FOR REDEMPTION SIGNED BY
YOU EXACTLY AS THE ACCOUNT IS REGISTERED IS REQUIRED. IF YOU HOLD CERTIFICATES,
THE CERTIFICATES, SIGNED IN THE NAME(S) SHOWN ON THE FACE OF THE CERTIFICATES,
MUST BE RECEIVED BY THE TRANSFER AGENT IN ORDER FOR THE REDEMPTION REQUEST TO BE
PROCESSED. IF REDEMPTION IS REQUESTED BY A CORPORATION, PARTNERSHIP, TRUST OR
FIDUCIARY, WRITTEN EVIDENCE OF AUTHORITY ACCEPTABLE TO THE TRANSFER AGENT MUST
BE SUBMITTED BEFORE SUCH REQUEST WILL BE ACCEPTED. All correspondence and
documents concerning redemptions should be sent to the Fund in care of its
Transfer Agent, Prudential Mutual Fund Services, Inc., Attention: Redemption
Services, P .O. Box 15010, New Brunswick, New Jersey 08906-5010.
If the proceeds of the redemption (a) exceed $50,000, (b) are to be paid to a
person other than the record owner, (c) are to be sent to an address other than
the address on the Transfer Agent's records, or (d) are to be paid to a
corporation, partnership, trust or fiduciary, the signature(s) on the redemption
request and on the certificates, if any, or stock power must be guaranteed by an
27
<PAGE>
"eligible guarantor institution." An "eligible guarantor institution" includes
any bank, broker, dealer or credit union. The Transfer Agent reserves the right
to request additional information from, and make reasonable inquiries of, any
eligible guarantor institution. For clients of Prusec, a signature guarantee may
be obtained from the agency or office manager of most Prudential Insurance and
Financial Services or Prudential Preferred Financial Services Offices.
PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE MADE BY CHECK WITHIN SEVEN
DAYS AFTER RECEIPT BY THE TRANSFER AGENT OF THE CERTIFICATE AND/OR WRITTEN
REQUEST EXCEPT AS INDICATED BELOW. IF YOU HOLD SHARES THROUGH PRUDENTIAL
SECURITIES, PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE CREDITED TO YOUR
PRUDENTIAL SECURITIES ACCOUNT, UNLESS YOU INDICATE OTHERWISE. Such payment may
be postponed or the right of redemption suspended at times (a) when the New York
Stock Exchange is closed for other than customary weekends and holidays, (b)
when trading on such Exchange is restricted, (c) when an emergency exists as a
result of which disposal by the Fund of securities owned by it is not reasonably
practicable or it is not reasonably practicable for the Fund fairly to determine
the value of its net assets, or (d) during any other period when the 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 would incur transaction costs in converting the
assets into cash. The Fund, however, has elected to be governed by Rule 18f-1
under the Investment Company Act, under which the Fund is obligated to redeem
shares solely in cash up to the lesser of $250,000 or 1% of the net asset value
of the Fund during any 90-day period for any one shareholder.
INVOLUNTARY REDEMPTION. In order to reduce expenses of the Fund, the Board of
Directors may redeem all of the shares of any shareholder, other than a
shareholder which is an IRA or other tax-deferred retirement plan, whose account
has a net asset value of less than $500 due to a redemption. The Fund will give
such shareholders 60 days' prior written notice in which to purchase sufficient
additional shares to avoid such redemption. No contingent deferred sales charge
will be imposed on any involuntary redemption.
90-DAY REPURCHASE PRIVILEGE. If you redeem your shares and have not previously
exercised the repurchase privilege, you may reinvest any portion or all of the
proceeds of such redemption in shares of the Fund at the NAV next determined
after the order is received, which must be within 90 days after the date of the
redemption. No sales charge will apply to such repurchases. You will receive PRO
RATA credit for any contingent deferred sales charge paid in connection with the
redemption of Class B or Class C shares. You must notify the Fund's Transfer
Agent, either directly or through Prudential Securities or Prusec, at the time
the repurchase privilege is exercised that you are entitled to credit for the
contingent deferred sales charge previously paid. Exercise of the repurchase
privilege will generally not affect federal income tax treatment of any gain
realized upon redemption. If the redemption resulted in a loss, some or all of
the loss, depending on the amount reinvested, will 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 redemptions by you which
28
<PAGE>
reduces the current value of your Class B or Class C shares to an amount which
is lower than the amount of all payments by you for shares during the preceding
six years, in the case of Class B shares, and one year, in the case of Class C
shares. A CDSC will be applied on the lesser of the original purchase price or
the current value of the shares being redeemed. Increases in the value of your
shares or shares acquired through reinvestment of dividends or distributions are
not subject to a CDSC. The amount of any 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--Class B Shares" below.
The amount of the CDSC, if any, will vary depending on the number of years
from the time of payment for the purchase of shares until the time of redemption
of such shares. Solely for purposes of determining the number of years from the
time of any payment for the purchase of shares, all payments during a month will
be aggregated and deemed to have been made on the last day of the month. The
CDSC will be calculated from the first day of the month after the initial
purchase, excluding the time shares were held in a money market fund. See "How
to Exchange Your Shares."
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 generally 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 NAV
had appreciated to $12 per share, the value of your Class B shares would be
$1,260 (105 shares at $12 per share). The CDSC would not be applied to the value
of the reinvested dividend shares and the amount which represents appreciation
($260). Therefore, $240 of the $500 redemption proceeds ($500 minus $260) would
be charged at a rate of 4% (the applicable rate in the second year after
purchase) for a total CDSC of $9.60.
For federal income tax purposes, the amount of the CDSC will reduce the gain
or increase the loss, as the case may be, on the amount recognized on the
redemption of shares.
WAIVER OF THE CONTINGENT DEFERRED SALES CHARGES--CLASS B SHARES. The CDSC will
be waived in the case of a redemption following the death or disability of a
shareholder or, in the case of a trust account, following the death or
disability of the grantor. The waiver is available for total or partial
redemptions of shares owned by a person, either individually or in joint tenancy
(with rights of survivorship), at the time of death or initial determination of
disability, provided that the shares were purchased prior to death or
disability.
29
<PAGE>
The CDSC will also be waived in the case of a total or partial redemption in
connection with certain distributions made without penalty under the Internal
Revenue Code from a tax-deferred retirement plan, an IRA or Section 403(b)
custodial account. These distributions include: (i) in the case of a
tax-deferred retirement plan, a lump-sum or other distribution after retirement;
(ii) in the case of an IRA or Section 403(b) custodial account, a lump-sum or
other distribution after attaining age 59 1/2; and (iii) a tax-free return of an
excess contribution or plan distributions following the death or disability of
the shareholder, provided that the shares were purchased prior to death or
disability. The waiver does not apply in the case of a tax-free rollover or
transfer of assets, other than one following a separation from service (I.E.,
following voluntary or involuntary termination of employment or following
retirement). Under no circumstances will the CDSC be waived on redemptions
resulting from the termination of a tax-deferred retirement plan, unless such
redemptions otherwise qualify for a waiver as described above. In the case of
Direct Account and PSI or Subsidiary Prototype Benefit Plans, the CDSC will be
waived on redemptions which represent borrowings from such plans. Shares
purchased with amounts used to repay a loan from such plans on which a CDSC was
not previously deducted will thereafter be subject to a CDSC without regard to
the time such amounts were previously invested. In the case of a 401(k) plan,
the CDSC will also be waived upon the redemption of shares purchased with
amounts used to repay loans made from the account to the participant and from
which a CDSC was previously deducted.
In addition, the CDSC will be waived on redemptions of shares held by a
Director of the Fund.
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 waiver of the CDSC and provide the Transfer Agent with such
supporting documentation as it may deem appropriate. The waiver will be granted
subject to confirmation of your entitlement. See "Purchase and Redemption of
Fund Shares--Waiver of the Contingent Deferred Sales Charge--Class B Shares" in
the Statement of Additional Information.
A quantity discount may apply to redemptions of Class B shares purchased prior
to August 1, 1994. See "Purchase and Redemption of Fund Shares--Quantity
Discount--Class B Shares Purchased Prior to August 1, 1994" in the Statement of
Additional Information.
CONVERSION FEATURE--CLASS B SHARES
Class B shares will automatically convert to Class A shares on a quarterly
basis approximately seven years after purchase. Conversions will be effected at
relative net asset value without the imposition of any additional sales charge.
The first conversion of Class B shares occurred in February 1995, when the
conversion feature was first implemented.
Since the Fund tracks amounts paid rather than the number of shares bought on
each purchase of Class B shares, the number of Class B shares eligible to
convert to Class A shares (excluding shares acquired through the automatic
reinvestment of dividends and other distributions) (the Eligible Shares) will be
determined on each conversion date in accordance with the following formula: (i)
the ratio of (a) the amounts paid for Class B shares purchased at least seven
years prior to the conversion date to (b) the total amount paid for all Class B
shares purchased and then held in your account (ii) multiplied by the total
number of Class B shares purchased and then held in your account. Each time any
Eligible Shares in your account convert to Class A shares, all shares or amounts
representing Class B shares then in your account that were acquired through the
automatic reinvestment of dividends and other distributions will convert to
Class A shares.
For purposes of determining the number of Eligible Shares, if the Class B
shares in your account on any conversion date are the result of multiple
purchases at different 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.
30
<PAGE>
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 such shares.
The conversion feature may be subject to the continuing availability of
opinions of counsel or rulings of the Internal Revenue Service (i) that the
dividends and other distributions paid on Class A, Class B and Class C shares
will not constitute "preferential dividends" under the Internal Revenue Code and
(ii) that the conversion of shares does not constitute a taxable event. The
conversion of Class B shares into Class A shares may be suspended if such
opinions or rulings are no longer available. If conversions are suspended, Class
B shares of the Fund will continue to be subject, possibly indefinitely, to
their higher annual distribution and service fee.
HOW TO EXCHANGE YOUR SHARES
AS A SHAREHOLDER OF THE FUND, YOU HAVE AN EXCHANGE PRIVILEGE WITH CERTAIN
OTHER PRUDENTIAL MUTUAL FUNDS, INCLUDING ONE OR MORE SPECIFIED MONEY MARKET
FUNDS, SUBJECT TO THE MINIMUM INVESTMENT REQUIREMENT OF SUCH FUNDS. CLASS A,
CLASS B AND CLASS C SHARES MAY BE EXCHANGED FOR CLASS A, CLASS B AND CLASS C
SHARES, RESPECTIVELY, OF ANOTHER FUND ON THE BASIS ON THE RELATIVE NAV. No sales
charge will be imposed at the time of the exchange. Any applicable CDSC payable
upon the redemption of shares exchanged will be calculated from the first day of
the month after the initial purchase, excluding the time 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. 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 THE TELEPHONE
EXCHANGE PRIVILEGE ON YOUR INITIAL APPLICATION FORM OR BY WRITTEN NOTICE TO THE
TRANSFER AGENT AND HOLD SHARES IN NON-CERTIFICATE FORM. Thereafter, you may call
the Fund at 1 (800) 225-1852 to execute a telephone exchange of shares on
weekdays, except holidays, between the hours of 8:00 A. M. and 6:00 P. M., New
York time. For your protection and to prevent fraudulent exchanges, your
telephone call will be recorded and you will be asked to provide your personal
identification number. A written confirmation of the exchange transaction will
be sent to you. NEITHER THE FUND NOR ITS AGENTS WILL BE LIABLE FOR ANY LOSS,
LIABILITY OR COST WHICH RESULTS FROM ACTING UPON INSTRUCTIONS REASONABLY
BELIEVED TO BE GENUINE UNDER THE FOREGOING PROCEDURES. All exchanges will be
made on the basis of the relative NAV of the two funds next determined after the
request is received in good order. The Exchange Privilege is available only in
states where the exchange may legally be made.
IF YOU HOLD SHARES THROUGH PRUDENTIAL SECURITIES OR THROUGH A DEALER WHICH HAS
ENTERED INTO A SELECTED DEALER AGREEMENT WITH THE FUND'S DISTRIBUTOR, YOU MUST
EXCHANGE YOUR SHARES BY CONTACTING YOUR 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.
31
<PAGE>
You may also exchange shares by mail by writing to Prudential Mutual Fund
Services, Inc., Attention: Exchange Processing, P .O. Box 15010, New Brunswick,
New Jersey 08906-5010.
IN PERIODS OF SEVERE MARKET OR ECONOMIC CONDITIONS THE TELEPHONE EXCHANGE OF
SHARES MAY BE DIFFICULT TO IMPLEMENT AND SHAREHOLDERS SHOULD MAKE EXCHANGES BY
MAIL BY WRITING TO PRUDENTIAL MUTUAL FUND SERVICES, INC., AT THE ADDRESS NOTED
ABOVE.
SPECIAL EXCHANGE PRIVILEGE. A special exchange privilege is available for
shareholders who qualify to purchase Class A shares at NAV. See "Alternative
Purchase Plan--Class A Shares--Reduction and Waiver of Initial Sales Charges"
above. Under this exchange privilege, amounts representing any Class B and Class
C shares (which are not subject to a CDSC) held in such a shareholder's account
will be automatically exchanged for Class A shares on a quarterly basis, unless
the shareholder elects otherwise. Eligibility for this exchange privilege will
be calculated on the business day prior to the date of the exchange. Amounts
representing Class B or Class C shares which are not subject to a CDSC include
the following: (1) amounts representing Class B or Class C shares acquired
pursuant to the automatic reinvestment of dividends and distributions, (2)
amounts representing the increase in the net asset value above the total amount
of payments for the purchase of Class B or Class C shares and (3) amounts
representing Class B or Class C shares held beyond the applicable CDSC period.
Class B and Class C shareholders must notify the Transfer Agent either directly
or through Prudential Securities or Prusec that they are eligible for this
special exchange privilege.
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 or 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 $50 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 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. Withdrawal of Class
B and Class C shares may be subject to a CDSC. See "How to Sell Your Shares--
Contingent Deferred Sales Charges."
-REPORTS TO SHAREHOLDERS. The Fund will send you annual and semi-annual
reports. The financial statements appearing in annual reports are audited by
independent accountants. In order to reduce duplicate mailing and printing
expenses, the Fund will
32
<PAGE>
provide one annual and semi-annual shareholder report and annual prospectus per
household. You may request additional copies of such reports by calling (800)
225-1852 (toll-free) or by writing to the Fund at One Seaport Plaza, New York,
New York 10292. In addition, monthly unaudited financial data are available upon
request from the Fund.
-SHAREHOLDER INQUIRIES. Shareholder 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.
33
<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 representative or telephone the Funds at
1 (800) 225-1852 for a free prospectus. Read the prospectus carefully before you
invest or send money.
TAXABLE BOND FUNDS
Prudential Adjustable Rate Securities Fund, Inc.
Prudential Diversified Bond Fund, Inc.
Prudential GNMA Fund, Inc.
Prudential Government Income Fund, Inc.
Prudential Government Securities Trust
Intermediate Term Series
Prudential High Yield Fund, Inc.
Prudential Structured Maturity Fund, Inc.
Income Portfolio
Prudential U.S. Government Fund
The BlackRock Government Income Trust
TAX-EXEMPT BOND FUNDS
Prudential California Municipal Fund
California Series
California Income Series
Prudential Municipal Bond Fund
High Yield Series
Insured Series
Modified Term Series
Prudential Municipal Series Fund
Arizona Series
Florida Series
Georgia Series
Hawaii Income Series
Maryland Series
Massachusetts Series
Michigan Series
Minnesota Series
New Jersey Series
New York Series
North Carolina Series
Ohio Series
Pennsylvania Series
Prudential National Municipals Fund, Inc.
GLOBAL FUNDS
Prudential Europe Growth Fund, Inc.
Prudential Global Fund, Inc.
Prudential Global Genesis Fund, Inc.
Prudential Global Natural Resources Fund, Inc.
Prudential Intermediate Global Income Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Prudential Short-Term Global Income Fund, Inc.
Global Assets Portfolio
Short-Term Global Income Portfolio
Global Utility Fund, Inc.
EQUITY FUNDS
Prudential Allocation Fund
Conservatively Managed Portfolio
Strategy Portfolio
Prudential Equity Fund, Inc.
Prudential Equity Income Fund
Prudential Growth Opportunity Fund, Inc.
Prudential IncomeVertible-Registered Trademark- Fund, Inc.
Prudential Multi-Sector Fund, Inc.
Prudential Utility Fund, Inc.
Nicholas-Applegate Fund, Inc.
Nicholas-Applegate Growth Equity Fund
MONEY MARKET FUNDS
- - TAXABLE MONEY MARKET FUNDS
Prudential Government Securities Trust
Money Market Series
U.S. Treasury Money Market Series
Prudential Special Money Market Fund
Money Market Series
Prudential MoneyMart Assets
- - TAX-FREE MONEY MARKET FUNDS
Prudential Tax Free Money Fund
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 Securities 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>
<S> <C>
PAGE
----
FUND HIGHLIGHTS...................................................... 2
Risk Factors and Special Characteristics........................... 2
FUND EXPENSES........................................................ 4
FINANCIAL HIGHLIGHTS................................................. 5
HOW THE FUND INVESTS................................................. 8
Investment Objective and Policies.................................. 8
Other Investments.................................................. 10
Other Investment Information....................................... 17
Investment Restrictions............................................ 18
HOW THE FUND IS MANAGED.............................................. 18
Manager............................................................ 18
Distributor........................................................ 19
Portfolio Transactions............................................. 21
Custodian and Transfer and Dividend Disbursing Agent............... 21
HOW THE FUND VALUES ITS SHARES....................................... 22
HOW THE FUND CALCULATES PERFORMANCE.................................. 22
TAXES, DIVIDENDS AND DISTRIBUTIONS................................... 23
GENERAL INFORMATION.................................................. 24
Description of Shares.............................................. 24
Additional Information............................................. 25
SHAREHOLDER GUIDE.................................................... 25
How to Buy Shares of the Fund...................................... 25
Alternative Purchase Plan.......................................... 26
How to Sell Your Shares............................................ 28
Conversion Feature--Class B Shares................................. 31
How to Exchange Your Shares........................................ 32
Shareholder Services............................................... 33
THE PRUDENTIAL MUTUAL FUND FAMILY.................................... A-1
</TABLE>
-------------------------------------------
130A 440134B
Class A: 743914202
CUSIP Nos.: Class B: 743914103
Class C: 743914301
Prudential
U.S. Government
Fund
- -------------------
[Logo]
<PAGE>
PROSPECTUS
DECEMBER ,
1994
<PAGE>
EXHIBIT 17(e)
PRUDENTIAL GOVERNMENT INCOME FUND, INC.
Supplement dated May 17, 1995 to
Prospectus dated May 1, 1995
HOW THE FUND INVESTS--OTHER INVESTMENTS AND POLICIES
THE FUND INVESTS AT LEAST 65% OF ITS TOTAL ASSETS IN U.S. GOVERNMENT
SECURITIES. UP TO 35% OF TOTAL ASSETS MAY BE COMMITTED TO INVESTMENTS OTHER
THAN U.S. GOVERNMENT SECURITIES, including investment in high quality money
market instruments, adjustable rate debt securities, collateralized mortgage
obligations and corporate debt obligations rated at the time of purchase at
least A by Moody's Investors Service or Standard & Poor's Ratings Group or,
if unrated, will be of equivalent quality in the judgment of the Fund's
Subadviser.
MF128C-1
<PAGE>
PRUDENTIAL MUTUAL FUNDS
Supplement dated July 3, 1995
The following information supplements the prospectuses of each of the Funds
listed on the reverse.
SHAREHOLDER GUIDE
HOW TO BUY SHARES OF THE FUND
REDUCTION AND WAIVER OF INITIAL SALES CHARGES.
PRUARRAY PLANS. Class A shares may be purchased at NAV by certain
retirement and deferred compensation plans, qualified or non-qualified under the
Internal Revenue Code of 1986, as amended, (the Code), including pension,
profit-sharing, stock-bonus or other employee benefit plans under Section 401 of
the Code and deferred compensation and annuity plans under Sections 457 and
403(b)(7) of the Code that participate in the Transfer Agent's PruArray Program
(a benefit plan record keeping service) (hereafter referred to as a PruArray
Plan); provided (i) that the plan has at least $1 million in existing assets or
1,000 eligible employees or participants and (ii) that Prudential Mutual Funds
constitute at least one-half of the plan's investment options. The term
"existing assets" for this purpose includes stock issued by a PruArray Plan
sponsor and shares of non-money market Prudential Mutual Funds and shares of
certain unaffiliated non-money market mutual funds that participate in the
PruArray Program (Participating Funds). "Existing assets" also include shares
of money market funds acquired by exchange from a Participating Fund. After a
PruArray Plan qualifies to purchase Class A shares at NAV, all subsequent
purchases will be made at NAV.
<PAGE>
Listed below are the names of the Prudential Mutual Funds and the dates of
the prospectuses to which this supplement relates.
NAME OF FUND PROSPECTUS DATE
------------ ---------------
Prudential Adjustable Rate Securities Fund, Inc. June 26, 1995
Prudential Allocation Fund September 29, 1994
Prudential Diversified Bond Fund, Inc. January 3, 1995
(as supplemented
June 20, 1995)
Prudential Equity Fund, Inc. February 28, 1995
Prudential Equity Income Fund December 30, 1994
Prudential Global Fund, Inc. January 3, 1995
Prudential Global Genesis Fund, Inc. August 1, 1994
Prudential Global Natural Resources Fund, Inc. August 1, 1994
Prudential GNMA Fund, Inc. March 2, 1995
Prudential Government Income Fund, Inc. May 1, 1995
Prudential Growth Opportunity Fund, Inc. February 1, 1995
Prudential High Yield Fund, Inc. February 28, 1995
Prudential IncomeVertible Fund, Inc. March 1, 1995
Prudential Intermediate Global Income Fund, Inc. March 2, 1995
Prudential Multi-Sector Fund, Inc. June 30, 1995
Prudential Pacific Growth Fund, Inc. January 3, 1995
Prudential Short-Term Global Income Fund, Inc.
Global Assets Portfolio January 3, 1995
Short-Term Global Income Fund January 3, 1995
Prudential Structured Maturity Fund, Inc. March 1, 1995
Prudential U.S. Government Fund January 3, 1995
Prudential Utility Fund, Inc. March 1, 1995
The BlackRock Government Income Trust November 1, 1994
(as supplemented
December 30, 1994)
Global Utility Fund, Inc. February 1, 1995
Nicholas-Applegate Fund, Inc. March 6, 1995
<PAGE>
EXHIBIT 17F
Prudential U.S. Government Fund
- --------------------------------------------------------------------------------
Prospectus dated January 3, 1995
- --------------------------------------------------------------------------------
Prudential U.S. Government Fund (the Fund) is an open-end, diversified
management investment company, or mutual fund, whose investment objective is to
seek a high total return (capital appreciation plus high current income). The
Fund will seek to achieve this objective primarily by investing in U.S.
Government securities, including U.S. Treasury bills, notes, bonds and other
debt securities issued by the U.S. Treasury, and obligations issued or
guaranteed by U.S. Government agencies or instrumentalities. The Fund may also
purchase and sell put and call options on U.S. Government securities and engage
in transactions involving futures contracts on U.S. Government securities and
options on such futures. See "How the Fund Invests--Investment Objective and
Policies." There is no assurance that the Fund's investment objective will be
achieved. The Fund's address is One Seaport Plaza, New York, New York 10292, and
its telephone number is (800) 225-1852.
- --------------------------------------------------------------------------------
This Prospectus sets forth concisely the information about the Fund that a
prospective investor should know before investing. Additional information about
the Fund has been filed with the Securities and Exchange Commission in a
Statement of Additional Information, dated January 3, 1995, which information is
incorporated herein by reference (is legally considered a part of this
Prospectus) and is available without charge upon request to the 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 U.S. GOVERNMENT FUND?
Prudential U.S. Government Fund 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 high total return (capital appreciation
plus high current income). There can be no assurance that the Fund's objective
will be achieved. See "How the Fund Invests--Investment Objective and Policies"
at page 8.
RISK FACTORS AND SPECIAL CHARACTERISTICS
In seeking to achieve its investment objective, the Fund invests primarily in
U.S. Government securities, including U.S. Treasury bills, notes and bonds and
other debt securities issued by the U.S. Treasury and obligations issued or
guaranteed by U.S. Government agencies and instrumentalities. See "How the Fund
Invests--Investment Objective and Policies" at page 8. The Fund may also engage
in various hedging and income enhancement strategies, including derivatives and
the purchase and sale of put and call options, financial futures contracts and
related short-term trading. See "How the Fund Invests--Other Investments" at
page 10.
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 November 30, 1994, PMF served as
manager or administrator to 68 investment companies, including 38 mutual funds,
with aggregate assets of approximately $47 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 18.
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 paid an annual distribution and service fee
which is currently being charged at the 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 an annual
distribution and service fee which is currently being charged at the rate of .85
of 1% of the average daily net assets of the Class B shares and .75 of 1% of the
average daily net assets of the Class C shares. See "How the Fund is
Managed--Distributor" at page 19.
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 25 and "Shareholder Guide--Shareholder Services"
at page 33.
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 22 and "Shareholder Guide--How to Buy Shares of the Fund" at page 25.
WHAT ARE MY PURCHASE ALTERNATIVES?
The Fund offers three classes of shares:
- 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 distribution-related
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.
See "Shareholder Guide--Alternative Purchase Plan" at page 26.
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 28.
HOW ARE DIVIDENDS AND DISTRIBUTIONS PAID?
The Fund expects to pay dividends of net investment income monthly and make
distributions of any net capital gains at least annually. Dividends and
distributions will be automatically reinvested in additional shares of the Fund
at NAV without a sales charge unless you request that they be paid to you in
cash. See "Taxes, Dividends and Distributions" at page 23.
3
<PAGE>
FUND EXPENSES
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES+ CLASS A SHARES CLASS B SHARES CLASS C SHARES
-------------- ------------------------ ------------------------
<S> <C> <C> <C>
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price)..... 4% None None
Maximum Sales Load or Deferred Sales Load
Imposed on Reinvested Dividends......... None None None
Deferred Sales Load (as a percentage of
original purchase price or redemption
proceeds, whichever is lower)........... None 5% during the first 1% on redemptions made
year, decreasing by 1% within one year of
annually to 1% in the purchase
fifth and sixth years
and 0% the seventh year*
Redemption Fees.......................... None None None
Exchange Fee............................. None None None
<CAPTION>
ANNUAL FUND OPERATING EXPENSES CLASS A SHARES CLASS B SHARES CLASS C SHARES**
-------------- ------------------------ ------------------------
<S> <C> <C> <C>
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management Fees.......................... .50% .50% .50%
12b-1 Fees++............................. .15% .85% .75%
Other Expenses........................... .44% .44% .44%
----- ----- -----
Total Fund Operating Expenses............ 1.09% 1.79% 1.69%
----- ----- -----
----- ----- -----
- ------------------
</TABLE>
<TABLE>
<CAPTION>
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------- -------- -------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000
investment, assuming (1) 5% annual return and (2)
redemption at the end of each time period:
Class A................................................ 51 73 98 168
Class B................................................ 68 86 107 183
Class C**.............................................. 27 53 92 200
You would pay the following expenses on the same
investment, assuming no redemption:
Class A................................................ 51 73 98 168
Class B................................................ 18 56 97 183
Class C**.............................................. 17 53 92 200
The above example with respect to Class B shares is based on restated data for the Fund's fiscal year ended
October 31, 1994. The above example with respect to Class C shares is based upon expenses expected to have
been incurred if Class C shares had been in existence during the entire fiscal year ended October 31, 1994.
THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE
GREATER OR LESS THAN THOSE SHOWN.
The purpose of this table is to assist investors in understanding the various costs and expenses that an
investor in the 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" include operating expenses of
the Fund, such as Trustees' and professional fees, registration fees, reports to shareholders and transfer
agency and custodian fees.
<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 entire fiscal year ended October
31, 1994.
+ 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
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, Class B and Class C Distribution and Service Plans
provide that the Fund may pay up to an annual rate of .30 of 1% of the
average daily net assets of the Class A shares and 1% of the average daily
net assets of each of the Class B and Class C shares, the Distributor has
agreed to limit its distribution fees with respect to Class A shares of the
Fund to .15 of 1% of the average daily net asset value of the Class A
shares, with respect to the Class B shares of the Fund to .85 of 1% of the
average daily net asset value of the Class B shares and, with respect to
the Class C shares of the Fund to .75 of 1% of the average daily net assets
of the Class C shares, each for the fiscal year ending October 31, 1995.
See "How the Fund is Managed--Distributor." Total operating expenses
without such limitations would be 1.24% for Class A shares, 1.94% for Class
B shares and 1.94% for Class C shares.
</TABLE>
4
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
(CLASS A SHARES)
The following financial highlights have been audited by Deloitte & Touche LLP,
independent accountants, whose report thereon was unqualified. This information
should be read in conjunction with the financial statements and notes thereto,
which appear in the Statement of Additional Information. The following financial
highlights contain selected data for a Class A share of beneficial interest
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.
<TABLE>
<CAPTION>
CLASS A
----------------------------------------- JANUARY 22,
1990@
YEAR ENDED OCTOBER 31, THROUGH
----------------------------------------- OCTOBER 31,
1994 1993 1992 1991 1990
-------- ------- ------- ------- -----------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
period....................... $ 10.59 $ 9.69 $ 9.49 $ 8.97 $ 9.31
-------- ------- ------- ------- -----------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income......... .61 .64 .68 .66 .55
Net realized and unrealized
gain (loss)
on investment transactions... (1.43) .90 .20 .52 (.34)
-------- ------- ------- ------- -----------
Total from investment
operations................... (.82) 1.54 .88 1.18 .21
-------- ------- ------- ------- -----------
LESS DISTRIBUTIONS:
Dividends from net investment
income....................... (.61) (.64) (.68) (.66) (.55)
-------- ------- ------- ------- -----------
Net asset value, end of
period....................... 9.16 $10.59 $ 9.69 $ 9.49 $ 8.97
-------- ------- ------- ------- -----------
-------- ------- ------- ------- -----------
TOTAL RETURN#................. (7.74)% 16.43% 9.39% 13.72% 2.16%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)........................ $6,776 $6,849 $5,024 $2,574 $1,617
Average net assets (000)...... $7,093 $6,339 $3,769 $2,158 $918
Ratios to average net assets:
Expenses, including
distribution fees.......... 1.09% .96% .94% 1.24% 1.08%*
Expenses, excluding
distribution fees.......... .94% .81% .79% 1.09% .94%*
Net investment income....... 6.35% 6.35% 6.92% 7.24% 7.16%*
Portfolio turnover............ 40% 66% 66% 236% 608%
<FN>
- -----------------
@ Commencement of offering of Class A shares.
# 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.
* Annualized.
</TABLE>
5
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
(CLASS B SHARES)
The following financial highlights have been audited by Deloitte & Touche LLP,
independent accountants, whose report thereon was unqualified. This information
should be read in conjunction with the financial statements and notes thereto,
which appear in the Statement of Additional Information. The following financial
highlights contain selected data for a Class B share of beneficial interest
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.
<TABLE>
<CAPTION>
CLASS B
-------------------------------------------------------------------------- NOVEMBER 7,
1986++
YEAR ENDED OCTOBER 31, THROUGH
-------------------------------------------------------------------------- OCTOBER 31,
1994 1993 1992 1991 1990 1989+++ 1988++ 1987
-------- -------- -------- -------- -------- -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
period....................... $ 10.60 $ 9.70 $ 9.50 $ 8.97 $ 9.54 $ 9.05 $ 9.04 $10.00
-------- -------- -------- -------- -------- -------- -------- -----------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income......... .53 .55 .59 .59 .62 .64 .66+ .65+
Net realized and unrealized
gain (loss)
on investment transactions... (1.44) .90 .20 .53 (.57) .52 .13 (.85)
-------- -------- -------- -------- -------- -------- -------- -----------
Total from investment
operations................... (.91) 1.45 .79 1.12 .05 1.16 .79 (.20)
-------- -------- -------- -------- -------- -------- -------- -----------
LESS DISTRIBUTIONS:
Dividends from net investment
income....................... (.53) (.55) (.59) (.59) (.62) (.64) (.66) (.65)
Distributions from net
realized gains............... -- -- -- -- -- -- -- (.11)
Distributions from paid-in
capital...................... -- -- -- -- -- (.03) (.12) --
-------- -------- -------- -------- -------- -------- -------- -----------
Total distributions........... (.53) (.55) (.59) (.59) (.62) (.67) (.78) (.76)
-------- -------- -------- -------- -------- -------- -------- -----------
Net asset value, end of
period....................... $ 9.16 $ 10.60 $ 9.70 $ 9.50 $ 8.97 $ 9.54 $ 9.05 $ 9.04
-------- -------- -------- -------- -------- -------- -------- -----------
-------- -------- -------- -------- -------- -------- -------- -----------
TOTAL RETURN#................. (8.58)% 15.44% 8.46% 12.86% .64% 13.53% 8.79% (2.21)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)........................ $124,094 $166,907 $155,143 $158,790 $172,521 $169,825 $169,261 $213,078
Average net assets (000)...... $146,123 $162,107 $154,502 $168,421 $174,276 $156,322 $191,342 $184,510
Ratios to average net assets:
Expenses, including
distribution fees.......... 1.75% 1.81% 1.79% 2.09% 1.99% 2.05% 1.76%+ 1.13%+*
Expenses, excluding
distribution fees.......... .94% .81% .79% 1.09% .99% 1.06% .75%+ .23%+*
Net investment income....... 5.69% 5.50% 6.07% 6.39% 6.89% 6.95% 7.36%+ 6.76%+*
Portfolio turnover............ 40% 66% 66% 236% 608% 392% 73% 64%
<FN>
- -----------------
# 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.
++ Commencement of investment operations.
* Annualized.
+ Net of expense subsidy and fee waiver.
++ On March 1, 1988, Prudential Mutual Fund Management, Inc. succeeded The
Prudential Insurance Company of America as manager of the Fund.
+++ Effective September 5, 1989, the Fund's investment objective changed from
seeking a high current return to seeking a high total return. Accordingly,
historical per share data and ratios may not accurately reflect future data
and ratios.
</TABLE>
6
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT THE INDICATED PERIOD)
(CLASS C SHARES)
The following financial highlights have been audited by Deloitte & Touche
LLP, independent accountants, whose report thereon was unqualified. This
information should be read in conjunction with the financial statements and
notes thereto, which appear in the Statement of Additional Information. The
following financial highlights contain selected data for a Class C share of
common stock outstanding, total return, ratios to average net assets and other
supplemental data for the period indicated. The information is based on data
contained in the financial statements.
<TABLE>
<CAPTION>
AUGUST 1,
1994* THROUGH
OCTOBER 30,
1994
--------------
<S> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
period.............................. $ 9.58
------
INCOME FROM INVESTMENT OPERATIONS
Net investment income (loss)......... .15
Net realized and unrealized gain
(loss) on investment transactions... (.42)
------
Total from investment operations... (.27)
------
LESS DISTRIBUTIONS
Dividends from net investment
income.............................. (.15)
------
Net asset value, end of period....... $ 9.16
------
------
TOTAL RETURN +:...................... (3.03)%
RATIOS/SUPPLEMENTAL DATA++:
Net assets, end of year (000)........ $ 46
Average net assets (000)............. $ 23
Ratios to average net assets:#
Expenses, including distribution
fees.............................. 1.82%*
Expenses, excluding distribution
fees.............................. 1.07%*
Net investment income (loss)....... 6.25%*
Portfolio turnover................... 39%
<FN>
------------------
*Commencement of offering of Class C 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.
#Because of the event referred to in * and the timing of such, the ratios
for Class C shares are not necessarily comparable to that of Class A and
Class B shares and are not necessarily indicative of future ratios.
</TABLE>
7
<PAGE>
HOW THE FUND INVESTS
INVESTMENT OBJECTIVE AND POLICIES
THE FUND'S INVESTMENT OBJECTIVE IS TO SEEK A HIGH TOTAL RETURN (CAPITAL
APPRECIATION PLUS HIGH CURRENT INCOME). THE FUND WILL SEEK TO ACHIEVE THIS
OBJECTIVE PRIMARILY BY INVESTING IN U.S. GOVERNMENT SECURITIES, INCLUDING U.S.
TREASURY BILLS, NOTES, BONDS AND OTHER DEBT SECURITIES ISSUED BY THE U.S.
TREASURY, AND OBLIGATIONS ISSUED OR GUARANTEED BY U.S. GOVERNMENT AGENCIES OR
INSTRUMENTALITIES. THESE GUARANTEES APPLY ONLY TO THE PAYMENT OF PRINCIPAL AND
INTEREST ON THESE SECURITIES AND DO NOT EXTEND TO THE SECURITIES' YIELD OR
VALUE, WHICH ARE LIKELY TO VARY WITH FLUCTUATIONS IN INTEREST RATES NOR DO THE
GUARANTEES EXTEND TO THE YIELD OR VALUE OF THE FUND'S SHARES. SEE "ADDITIONAL
INVESTMENT INFORMATION--MORTGAGE-RELATED SECURITIES ISSUED BY U.S. GOVERNMENT
INSTRUMENTALITIES" IN THE STATEMENT OF ADDITIONAL INFORMATION. AT LEAST 65% OF
THE TOTAL ASSETS OF THE FUND WILL BE INVESTED IN U.S. GOVERNMENT SECURITIES.
THERE CAN BE NO ASSURANCE THAT THE FUND WILL MEET ITS OBJECTIVE. See "Investment
Objectives and Policies" in the Statement of Additional Information.
THE FUND'S INVESTMENT OBJECTIVE IS A FUNDAMENTAL POLICY AND MAY NOT BE CHANGED
WITHOUT THE APPROVAL 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.
U.S. GOVERNMENT SECURITIES
U.S. TREASURY SECURITIES
THE FUND WILL INVEST IN U.S. TREASURY SECURITIES, INCLUDING BILLS, NOTES,
BONDS AND OTHER DEBT SECURITIES ISSUED BY THE U.S. TREASURY. These instruments
are direct obligations of the U.S. Government and, as such, are backed by the
"full faith and credit" of the United States. They differ primarily in their
interest rates, the lengths of their maturities and the dates of their
issuances.
SECURITIES ISSUED OR GUARANTEED BY U.S. GOVERNMENT AGENCIES AND
INSTRUMENTALITIES
THE FUND WILL INVEST IN SECURITIES ISSUED BY AGENCIES OF THE U.S. GOVERNMENT
OR INSTRUMENTALITIES OF THE U.S. GOVERNMENT. These obligations, including those
which are guaranteed by federal agencies or instrumentalities, may or may not be
backed by the full faith and credit of the United States. Obligations of the
Government National Mortgage Association (GNMA), the Farmers Home Administration
and the Export-Import Bank are backed by the full faith and credit of the United
States. In the case of securities not backed by the full faith and credit of the
United States, the Fund must look principally to the agency issuing or
guaranteeing the obligation for ultimate repayment and may not be able to assert
a claim against the United States if the agency or instrumentality does not meet
its commitments. Securities in which the Fund may invest which are not backed by
the full faith and credit of the United States include obligations such as those
issued by the Tennessee Valley Authority, the Federal National Mortgage
Association (FNMA), the Federal Home Loan Mortgage Corporation (FHLMC) and the
United States Postal Service, each of which has the right to borrow from the
United States Treasury to meet its obligations, and obligations of the Federal
Farm Credit Bank and the Federal Home Loan Bank, the obligations of which may
only be satisfied by the individual credit of the issuing agency. GNMA, FNMA and
FHLMC investments may include collateralized mortgage obligations. See "Other
Investments" below.
8
<PAGE>
Obligations issued or guaranteed as to principal and interest by the United
States 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 United States Treasury notes or bonds. Such notes and bonds are held
in custody by a bank on behalf of the owners. These custodial receipts are
commonly referred to as Treasury strips.
MORTGAGE-RELATED SECURITIES ISSUED BY U.S. GOVERNMENT AGENCIES AND
INSTRUMENTALITIES
THE FUND WILL INVEST IN MORTGAGE-BACKED SECURITIES INCLUDING THOSE
REPRESENTING AN UNDIVIDED OWNERSHIP INTEREST IN A POOL OF MORTGAGES, E.G., GNMA,
FNMA AND FHLMC CERTIFICATES. The U.S. Government or the issuing agency
guarantees the payment of interest and principal of these securities. However,
the guarantees do not extend to the securities' yield or value, which are likely
to vary inversely with fluctuations in interest rates, nor do the guarantees
extend to the yield or value of the Fund's shares. See "Additional Investment
Information--Mortgage-Related Securities Issued by U.S. Government
Instrumentalities" in the Statement of Additional Information. These
certificates are in most cases "pass-through" instruments, through which the
holder receives a share of all interest and principal payments from the
mortgages underlying the certificate, net of certain fees. Because the
prepayment characteristics of the underlying mortgages vary, it is not possible
to predict accurately the average life or realized yield 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
obligations. For example, securities backed by mortgages with thirty-year
maturities are customarily treated as prepaying fully in the twelfth year and
securities backed by mortgages with fifteen-year maturities are treated as
prepaying fully in the seventh year. During periods of declining interest rates,
prepayment of mortgages underlying mortgage-backed securities can be expected to
accelerate. The Fund's ability to maintain a portfolio of high-yielding
mortgage-backed securities will be adversely affected to the extent that
prepayments of mortgages must be reinvested in securities which have lower
yields than the prepaid mortgages. Moreover, prepayments of mortgages which
underlie securities purchased at a premium could result in capital losses.
THE FUND MAY ALSO INVEST IN BALLOON PAYMENT MORTGAGE-BACKED SECURITIES. A
balloon payment mortgage-backed security is an amortizing mortgage security with
installments of principal and interest, the last installment of which is
predominantly principal.
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.
ZERO-COUPON BONDS
THE FUND MAY INVEST IN ZERO-COUPON U.S. GOVERNMENT SECURITIES. Zero-coupon
bonds are generally purchased at a discount from the face amount because the
buyer receives only the right to receive a fixed payment on a certain date in
the future and does not receive any periodic interest payments. The effect of
owning instruments which do not make current interest payments is that a fixed
yield is earned not only on the original investment but also, in effect, on all
discount accretion during the life of the obligations. This implicit
reinvestment of earnings at the same rate eliminates the risk of being unable to
reinvest distributions at a rate as high as the implicit yield on the
zero-coupon bond, but at the same time eliminates the holder's ability to
reinvest at higher rates in the future. For this reason, zero-coupon bonds are
subject to substantially greater price fluctuations
9
<PAGE>
during periods of changing market interest rates than are comparable securities
which pay interest currently, which fluctuation increases the longer the period
to maturity.
Although the Fund does not receive interest payments on zero-coupon bonds in
cash, it is required to accrue interest on such bonds for tax purposes.
Accordingly, in order to meet the requirement that it distribute at least 90% of
its net investment income and net short-term gains earned in each taxable year,
the Fund may have to liquidate securities or borrow money. To date, the Fund has
not engaged in borrowing or liquidated securities solely or primarily for the
purpose of meeting income distribution requirements attributable to investments
in zero-coupon bonds. See "Taxes" in the Statement of Additional Information.
Only zero-coupon government securities issued as such by the U.S. Government
under its Separate Trading of Registered Interest and Principal Securities
(STRIPS) program are treated by the Fund as U.S. Government securities.
Zero-coupon securities created by financial institutions (usually investment
banks) such as the Certificates of Accrual on Treasury securities (CATS) created
by Salomon Brothers, Inc. and the Lehman Investment Opportunity Notes (LIONS)
created by Shearson Lehman Hutton, Inc., may be purchased by the Fund, subject
to the 35% limit on "Other Investments," described below.
ADJUSTABLE RATE U.S. GOVERNMENT SECURITIES
THE FUND MAY INVEST IN ADJUSTABLE RATE U.S. GOVERNMENT SECURITIES. Adjustable
rate securities are debt securities having interest rates which are adjusted or
reset at periodic intervals ranging from one month to three years. The interest
rate of an adjustable rate security typically responds to changes in general
market levels of interest. The interest paid on any particular adjustable rate
security is a function of the index upon which the interest rate of that
security is based.
The adjustable rate feature of the securities in which the Fund may invest
will tend to reduce sharp changes in the Fund's net asset value in response to
normal interest rate fluctuations. As the coupon rates of the Fund's adjustable
rate securities are reset periodically, yields of these portfolio securities
will reflect changes in market rates and should cause the net asset value of the
Fund's shares to fluctuate less dramatically than that of a fund invested in
long-term fixed rate securities. However, while the adjustable rate feature of
such securities will tend to limit sharp swings in the Fund's net asset value in
response to movements in general market interest rates, it is anticipated that
during periods of fluctuations in interest rates, the net asset value of the
Fund will fluctuate. See "Other Investments" below.
OTHER INVESTMENTS
AT LEAST 65% OF THE TOTAL ASSETS OF THE FUND WILL BE INVESTED IN U.S.
GOVERNMENT SECURITIES, AS DESCRIBED ABOVE. U.S. Government securities which are
purchased pursuant to repurchase agreements or on a when-issued or delayed
delivery basis will be treated as U.S. Government securities for purposes of
this calculation. See "Repurchase Agreements" and "When-Issued and Delayed
Delivery Securities" below.
UP TO 35% OF THE TOTAL ASSETS OF THE FUND MAY BE COMMITTED TO INVESTMENTS
OTHER THAN U.S. GOVERNMENT SECURITIES. These investments would include the
securities described in this subsection ("Other Investments") as well as
purchased put and call options on securities and purchased put and call options
on futures contracts. See "Options Transactions" and "Transactions in Futures
Contracts and Options Thereon" below.
THE FUND MAY ALSO INVEST IN DEBT SECURITIES OF COMPANIES WHICH ARE RATED, OR
ARE ISSUED BY COMPANIES THAT HAVE OUTSTANDING DEBT SECURITIES RATED, A OR HIGHER
BY STANDARD & POOR'S RATINGS GROUP, MOODY'S INVESTORS SERVICE OR BY A NATIONALLY
RECOGNIZED STATISTICAL RATING ORGANIZATION (NRSRO), OR, IF NOT RATED, ARE OF
COMPARABLE QUALITY IN THE OPINION OF THE FUND'S INVESTMENT ADVISER. The Fund has
no limitations with respect to the maturities of portfolio securities in which
it may invest. The prices of debt securities generally increase when interest
rates decline and decrease when interest rates rise. See "Description of
Security Ratings" in the Appendix to the Statement of Additional Information.
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THE FUND IS PERMITTED TO INVEST UP TO 20% OF ITS TOTAL ASSETS IN HIGH QUALITY
MONEY MARKET INSTRUMENTS, INCLUDING COMMERCIAL PAPER OF DOMESTIC CORPORATIONS
AND CERTIFICATES OF DEPOSIT, BANKERS' ACCEPTANCES AND OTHER OBLIGATIONS OF
DOMESTIC AND FOREIGN BANKS. Such obligations will, at the time of purchase, be
rated within the two highest quality grades as determined by Moody's Investors
Service or Standard & Poor's Ratings Group (or another nationally recognized
statistical rating organization (NRSRO)) or, if unrated, will be of equivalent
quality in the judgment of the Fund's investment adviser.
THE FUND MAY INVEST IN OBLIGATIONS OF FOREIGN BANKS AND FOREIGN BRANCHES OF
U.S. BANKS ONLY IF AFTER GIVING EFFECT TO SUCH INVESTMENT ALL SUCH INVESTMENTS
WOULD CONSTITUTE LESS THAN 10% OF THE FUND'S TOTAL ASSETS (DETERMINED AT THE
TIME OF INVESTMENT). These investments may be subject to certain risks,
including future political and economic developments, the possible imposition of
withholding taxes on interest income, the seizure or nationalization of foreign
deposits and foreign exchange controls or other restrictions. In addition, there
may be less publicly available information about a foreign bank or foreign
branch of a U.S. bank than about a domestic bank and such entities may not be
subject to the same accounting, auditing and financial recordkeeping standards
and requirements as domestic banks.
THE FUND MAY INVEST IN DEBT SECURITIES WHICH ARE DENOMINATED IN UNITED STATES
DOLLARS AND THAT ARE ISSUED BY FOREIGN CORPORATIONS, FOREIGN GOVERNMENTS OR BY
SUPRANATIONAL ORGANIZATIONS such as the World Bank, which was chartered to
finance development projects in developing member countries; the European
Community, which is a twelve-nation organization engaged in cooperative economic
activities; the European Coal and Steel Community, which is an economic union of
various European nations' steel and coal industries; and the Asian Development
Bank, which is an international development bank established to lend funds,
promote investment and provide technical assistance to member nations in the
Asian and Pacific regions.
THE FUND MAY ALSO PURCHASE PRIVATE MORTGAGE PASS-THROUGH SECURITIES. Private
mortgage pass-through securities are structured similarly to GNMA, FNMA and
FHLMC mortgage pass-through securities and are issued by originators of and
investors in mortgage loans, including depository institutions, mortgage banks,
investment banks and special purpose subsidiaries of the foregoing. These
securities usually are backed by a pool of conventional fixed rate or adjustable
rate mortgage loans. Since private mortgage pass-through securities typically
are not guaranteed by an entity having the credit status of GNMA, FNMA and
FHLMC, such securities generally are structured with one or more types of credit
enhancement. The Fund will only purchase private mortgage pass-through
securities that are rated A or better by a NRSRO.
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 CMOs issued by GNMA, FNMA or
FHLMC and in privately issued CMOs which are collateralized by mortgage-backed
securities issued by GNMA, FHLMC or FNMA or by whole loan-private mortgage
pass-through securities and by balloon payment mortgage-backed securities. CMOs
issued by GNMA, FHLMC or FNMA are considered U.S. Government securities for
purposes of this Prospectus. In reliance on recently enacted rules and on
interpretations of the Securities and Exchange Commission (SEC), the Fund's
investments in certain qualifying CMOs are not subject to the Investment Company
Act's limitation on acquiring interests in other investment companies. To the
extent the issuer of a privately issued CMO is considered to be an "investment
company" under these rules and interpretations, the Fund's investment in the
CMOs of such issuer will be limited to no more than 5% of the Fund's total
assets, and the Fund's investment in all such CMOs, together with securities
issued by other investment companies, will not exceed 5% of the Fund's total
assets. See "Additional Investment Information-- Collateralized Mortgage
Obligations" in the Statement of Additional Information.
THE FUND MAY ALSO PURCHASE ZERO-COUPON SECURITIES CREATED BY FINANCIAL
INSTITUTIONS. See "Zero-Coupon Bonds" above.
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THE FUND MAY ALSO PURCHASE NON-U.S. GOVERNMENT ADJUSTABLE RATE SECURITIES.
Adjustable rate securities allow the Fund to participate in increases in
interest rates through periodic interest rate adjustments resulting in both
higher yields and lower price fluctuations. During periods of declining interest
rates, coupon rates may readjust downward resulting in lower yields to the Fund.
The value of an adjustable rate security is unlikely to rise during periods of
declining interest rates to the same extent as fixed rate instruments. With
mortgage-backed securities, interest rate declines may result in accelerated
prepayment of mortgages with the result that proceeds from prepayments will be
reinvested at lower interest rates. During periods of rising interest rates,
changes in the coupon rate will lag behind changes in the market rate resulting
in a lower net asset value until the coupon resets to market rates. Investors
who sell shares before the interest rates in portfolio securities are adjusted
could suffer some loss of principal. Adjustable rate securities are also
typically subject to maximum increases and decreases in the interest rate
adjustment which can be made on any one adjustment date, in any one year, or
during the life of the security. In the event of dramatic increases or decreases
in prevailing market interest rates, the value of the Fund may fluctuate more
substantially since these limits may prevent the security from fully adjusting
its interest rate to the prevailing market rates. See "Adjustable Rate U.S.
Government Securities" above.
THE FUND MAY ALSO PURCHASE ADJUSTABLE RATE MORTGAGE SECURITIES (ARMS), which
are pass-through mortgage securities collateralized by mortgages with adjustable
rather than fixed rates. ARMs eligible for inclusion in a mortgage pool
generally provide for a fixed initial mortgage interest rate for either the
first three, six, twelve, thirteen, thirty-six or sixty scheduled monthly
payments. Thereafter, the interest rates are subject to periodic adjustment
based on changes to a designated benchmark index.
ARMs contain maximum and minimum rates beyond which the mortgage interest rate
may not vary over the lifetime of the security. In addition, certain ARMs
provide for additional limitations on the maximum amount by which the mortgage
interest rate may adjust for any single adjustment period. Alternatively,
certain ARMs contain limitations on changes in the required monthly payment. In
the event that a monthly payment is not sufficient to pay the interest accruing
on an ARM, any such excess interest is added to the principal balance of the
mortgage loan, which is repaid through future monthly payments. If the monthly
payment for such an instrument exceeds the sum of the interest accrued at the
applicable mortgage interest rate and the principal payment required at such
point to amortize the outstanding principal balance over the remaining term of
the loan, the excess is utilized to reduce the then outstanding principal
balance of the ARM.
THE FUND MAY ALSO INVEST IN ASSET-BACKED SECURITIES. Through the use of trusts
and special purpose subsidiaries, various types of assets, primarily automobile
and credit card receivables, have been securitized in pass-through structures
similar to mortgage pass-through structures or in a pay-through structure
similar to the collateralized mortgage structure. The Fund may invest in these
and other types of asset-backed securities which may be developed in the future.
Asset-backed securities present certain risks that are not presented by
mortgage-backed securities. Primarily, these securities do not have the benefit
of the same security interest in the related collateral. Credit card receivables
are generally unsecured. In connection with automobile receivables, the security
interests in the underlying automobiles are often not transferred when the pool
is created, with the resulting possibility that the collateral could be resold.
In general, these types of loans are of shorter average life than mortgage loans
and are less likely to have substantial prepayments.
OPTIONS TRANSACTIONS
THE FUND WRITES (I.E., SELLS) COVERED PUT AND CALL OPTIONS ON U.S. GOVERNMENT
SECURITIES. When the Fund writes an option, it receives a premium which it
retains whether or not the option is exercised. The Fund's principal reason for
writing options is to realize, through the receipt of premiums, a greater
current return than would be realized on the underlying securities alone.
THERE IS NO LIMITATION ON THE AMOUNT OF CALL OPTIONS THE FUND MAY WRITE.
HOWEVER, THE FUND MAY ONLY WRITE COVERED PUT OPTIONS TO THE EXTENT THAT COVER
FOR SUCH OPTIONS DOES NOT EXCEED 50% OF THE FUND'S NET ASSETS. See "Additional
Investment Information--Options Transactions and Related Risks" in the Statement
of Additional Information.
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THE FUND MAY PURCHASE PUT AND CALL OPTIONS ON U.S. GOVERNMENT SECURITIES. The
Fund may purchase call options on U.S. Government securities it intends to
acquire in order to hedge against an anticipated market appreciation in the
price of the underlying securities at limited risk and with a limited cash
outlay. Similarly, the Fund may purchase call options on U.S. Government
securities as a hedge against appreciation in the value of other debt securities
it intends to acquire when there is a high degree of correlation between the
value of the U.S. Government securities underlying the call option and the value
of the securities to be acquired. If the market price does rise as anticipated,
the Fund will benefit from that rise but only to the extent that the rise
exceeds the premiums paid. If the anticipated rise does not occur or if it does
not exceed the premium, the Fund will bear the expense of the option premiums
and transaction costs without gaining an offsetting benefit. If the Fund
purchases a call option on U.S. Government securities as a hedge against
appreciation in the value of other debt securities it intends to acquire, there
is an additional risk that the correlation between the two values will not be as
close as anticipated. The Fund may also purchase a call option to close an
existing option position.
The Fund may purchase put options on U.S. Government securities in an effort
to protect the value of a security which it owns against a substantial decline
in market value (protective puts). The Fund would use this strategy if the
Fund's investment adviser believes that a defensive posture is warranted for a
portion of the portfolio. Protection is provided during the life of the put
because the put gives the Fund the right to sell the underlying security at the
put exercise price, regardless of a decline in the underlying security's market
price below the exercise price. This right protects the Fund from the security's
possible decline in value below the strike price of the option. Any loss to the
Fund is limited to the premium paid for, and commissions paid in connection
with, the put plus the initial excess, if any, of the market price of the
underlying security over the put's exercise price. However, if the market price
of the security increases, the profit the Fund realizes on the sale of the
security will be reduced by the premium paid for, and the commissions paid in
connection with, the put option. The Fund may also purchase a put option to
cover a put option it has written.
The Fund may wish to protect certain portfolio securities against a decline in
market value at a time when put options on those particular securities are not
available for purchase. The Fund may therefore purchase a put option on
securities other than those it wishes to protect even though it does not hold
such other securities in its portfolio. While changes in the value of the put
option should generally offset changes in the value of the securities being
hedged, the correlation between the two values may not be as close in these
transactions as in transactions in which the Fund purchases a put option on an
underlying security it owns.
THE FUND WILL NOT PURCHASE AN OPTION ON U.S. GOVERNMENT SECURITIES IF, AS A
RESULT OF SUCH PURCHASE, MORE THAN 20% OF ITS TOTAL ASSETS WOULD BE INVESTED IN
PREMIUMS FOR SUCH OPTIONS AND ON OPTIONS ON FUTURES CONTRACTS ON U.S. GOVERNMENT
SECURITIES.
OTHER CONSIDERATIONS
ALL OPTIONS PURCHASED OR SOLD BY THE FUND WILL BE TRADED ON A U.S. SECURITIES
EXCHANGE OR WILL BE PURCHASED OR SOLD BY A PRIMARY GOVERNMENT SECURITIES DEALER
RECOGNIZED BY THE FEDERAL RESERVE BANK OF NEW YORK (OTC OPTIONS). While
exchange-traded options are in effect guaranteed by the Options Clearing
Corporation, the Fund relies on the dealer from whom it purchases an OTC option
to perform if the option is exercised. Failure by the dealer to do so would
result in the loss of premium paid by the Fund as well as loss of the expected
benefit of the transaction.
Exchange-traded options generally have a continuous liquid market while OTC
options may not. Consequently, the Fund will generally be able to realize the
value of an OTC option it has purchased only by exercising it or reselling it to
the dealer who issued it. Similarly, when the Fund writes an OTC option, it
generally will be able to close out the OTC option prior to its expiration only
by entering into a closing purchase transaction with the dealer to which the
Fund originally wrote the OTC option. While the Fund will seek to enter into OTC
options only with dealers who will agree to and which are expected to be capable
of entering into closing transactions with the Fund, there can be no assurance
that the Fund will be able to liquidate an OTC option at a favorable price at
any time prior to expiration. Until the Fund, as a covered OTC call option
writer, is able to effect a closing purchase transaction, it will not be able to
liquidate securities used as cover until the option expires, is exercised or the
Fund provides substitute cover. In
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the event of insolvency of the contra party, the Fund may be unable to liquidate
an OTC option. With respect to options written by the Fund, the inability to
enter into a closing transaction may result in material losses to the Fund. For
example, since the Fund must maintain a covered position with respect to any
call option on a security it writes, the Fund may be limited in its ability to
sell the underlying security while it is obligated under an option. This
requirement may impair the Fund's ability to sell a portfolio security at a time
when such a sale might be advantageous.
The Fund's investment adviser monitors the creditworthiness of dealers with
whom the Fund enters into OTC option transactions under the Trustees' general
supervision. The Fund's ability to enter into options contracts may be limited
by the Internal Revenue Code's requirements for qualification as a registered
investment company. See "Additional Investment Information--Options Transactions
and Related Risks" in the Statement of Additional Information.
TRANSACTIONS IN 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 (CFTC). THESE FUTURES
CONTRACTS AND RELATED OPTIONS WILL BE ON DEBT SECURITIES, FINANCIAL INDICES,
U.S. GOVERNMENT SECURITIES, FOREIGN GOVERNMENT SECURITIES AND FOREIGN CURRENCIES
AND INCLUDE FUTURES CONTRACTS AND OPTIONS WHICH ARE LINKED TO THE LONDON
INTERBANK OFFERED RATE (LIBOR). A futures contract is an agreement to purchase
or sell an agreed amount of such securities at a set price for delivery on an
agreed future date. The Fund may purchase a futures contract as a hedge against
an anticipated decline in interest rates, and resulting increase in market
price, in securities the Fund intends to acquire. The Fund may sell a futures
contract as a hedge against an anticipated increase in interest rates, and
resulting decline in market price, in securities the Fund owns.
THE FUND MAY ALSO PURCHASE AND WRITE (I.E., SELL) "COVERED" PUT AND CALL
OPTIONS ON FUTURES CONTRACTS THAT ARE TRADED ON U.S. COMMODITY EXCHANGES. The
Fund will write options on futures contracts for hedging purposes as well as to
realize through the receipt of premium income a greater return than would be
realized on the Fund's portfolio securities alone. An option on a futures
contract gives the purchaser the right, in return for the premium paid, to
assume a position in a futures contract (a long position if the option is a call
and a short position if the option is a put) at a specified exercise price at
any time during the option exercise period. The writer of the option is required
upon exercise to assume an offsetting futures position (a short position if the
option is a call and a long position if the option is a put). Upon exercise of
the option, the assumption of offsetting futures positions by the writer and
holder of the option will be accompanied by delivery of the accumulated cash
balance in the writer's futures margin account which represents the amount by
which the market price of the futures contract, at exercise, exceeds, in the
case of a call, or is less than, in the case of a put, the exercise price of the
option on the futures contract. The Fund may also enter into closing
transactions with respect to futures contracts and options thereon to terminate
existing positions.
THE FUND MAY ALSO FROM TIME TO TIME PURCHASE EURODOLLAR INSTRUMENTS TRADED ON
THE CHICAGO MERCANTILE EXCHANGE. EURODOLLAR INSTRUMENTS ARE ESSENTIALLY U.S.
DOLLAR-DENOMINATED FUTURES CONTRACTS OR OPTIONS THEREON WHICH ARE LINKED TO
LIBOR. Eurodollar futures contracts enable purchasers to obtain a fixed rate for
the lending of funds and sellers to obtain a fixed rate for borrowings. The Fund
intends to use Eurodollar futures contracts and options thereon to hedge against
changes in LIBOR, to which many interest rate swaps are linked. The use of these
instruments is subject to the same limitations and risks as those applicable to
the use of interest rate futures contracts and options thereon.
THE FUND WILL ENGAGE IN TRANSACTIONS IN FUTURES CONTRACTS AND OPTIONS THEREON
ONLY FOR BONA FIDE HEDGING, YIELD ENHANCEMENT AND RISK MANAGEMENT PURPOSES, IN
EACH CASE IN ACCORDANCE WITH THE RULES AND REGULATIONS OF THE CFTC, AND NOT FOR
SPECULATION.
As an alternative to BONA FIDE hedging as defined by the CFTC, the Fund may
comply with a different standard established by CFTC rules with respect to
futures contracts and options thereon purchased by the Fund incidental to the
Fund's activities in the
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securities markets, under which the value of the assets underlying such
positions will not exceed the sum of (i) cash set aside in an identifiable
manner or short-term U.S. Government or other U.S. dollar-denominated high-grade
short-term debt securities segregated for this purpose, (ii) cash proceeds on
existing investments due within thirty days, and (iii) accrued profits on the
particular futures contract or option thereon.
THE FUND WILL NOT ENTER INTO FUTURES CONTRACTS OR RELATED OPTIONS FOR YIELD
ENHANCEMENT AND RISK MANAGEMENT PURPOSES FOR WHICH THE AGGREGATE INITIAL MARGIN
AND PREMIUMS EXCEED 5% OF THE LIQUIDATION VALUE OF THE FUND'S TOTAL ASSETS AFTER
TAKING INTO ACCOUNT UNREALIZED PROFITS AND UNREALIZED LOSSES ON ANY SUCH
CONTRACTS THE FUND HAS ENTERED INTO; PROVIDED, HOWEVER, THAT IN THE CASE OF AN
OPTION THAT IS IN-THE-MONEY AT THE TIME OF PURCHASE, THE IN-THE-MONEY AMOUNT MAY
BE EXCLUDED IN COMPUTING SUCH 5%. THE FUND MAY PURCHASE AND SELL FUTURES
CONTRACTS OR RELATED OPTIONS, WITHOUT LIMITATION, FOR BONA FIDE HEDGING
PURPOSES. THE FUND'S ABILITY TO ENTER INTO TRANSACTIONS IN FUTURES CONTRACTS AND
OPTIONS THEREON MAY BE LIMITED BY THE INTERNAL REVENUE CODE'S REQUIREMENTS FOR
QUALIFICATION AS A REGULATED INVESTMENT COMPANY. See "Taxes" in the Statement of
Additional Information. Except as described above, there are no other
restrictions on the Fund's ability to enter into transactions in futures
contracts and options thereon.
RISK CONSIDERATIONS
CERTAIN RISKS ARE INHERENT IN THE FUND'S USE OF FUTURES CONTRACTS AND OPTIONS
ON FUTURES. One such risk arises because the correlation between movements in
the price of futures and movements in the price of the debt securities that are
the subject of the hedge will not be perfect. Another risk is that the movements
in the price of futures contracts or options on futures may not move inversely
with changes in interest rates. If the Fund has sold futures contracts to hedge
securities held by the Fund and the value of the futures position declines more
than the price of such securities increases, the Fund will realize a loss on the
futures contracts which is not completely offset by the appreciation in the
price of the hedged securities. Similarly, if the Fund has written a call on a
futures contract and the value of the call increases by more than the increase
in the value of the securities held as cover, the Fund may realize a loss on the
call which is not completely offset by the appreciation in the price of the
securities held as cover and the premium received for writing the call.
The Fund's ability to establish and close out positions in futures contracts
and options on futures contracts will be subject to the existence of a liquid
secondary market. Although the Fund generally will purchase or sell only those
futures contracts and options thereon for which there appears to be an active
secondary market, there is no assurance that a liquid secondary market on an
exchange will exist for any particular futures contract or option or at any
particular time. In the event no such market exists for a particular futures
contract or option thereon in which the Fund maintains a position, it will not
be possible to effect a closing transaction in that contract and the Fund would
have to either make or take delivery under the futures contract, or in the case
of a written option, wait to sell the underlying securities until the option
expires or is exercised. In the case of a futures contract which the Fund is
unable to close, the Fund would be required to maintain margin deposits on the
contract and to make variation margin payments until the contract is closed.
Successful use of futures contracts and options thereon by the Fund is subject
to the ability of the Fund's investment adviser to predict correctly movements
in the direction of interest rates and securities prices. If the investment
adviser's expectations are not met, the Fund would be in a worse position than
if a hedging strategy had not been pursued. Certain skills required to
successfully use futures contracts or related options are different from those
required to select portfolio securities. The Fund's investment adviser advises
other investment companies which invest in futures contracts for BONA FIDE
hedging.
Exchanges on which futures contracts are traded may impose limits on the
positions that the Fund may take in certain circumstances. In addition, some
futures markets have daily limits on market price movements of certain futures
contracts.
See "Additional Investment Information--Futures Contracts on U.S. Government
Securities" in the Statement of Additional Information.
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REPURCHASE AGREEMENTS
The Fund may on occasion enter into repurchase agreements, whereby the seller
of a security agrees to repurchase that security from the Fund at a mutually
agreed-upon time and price. The repurchase date is usually within a day or two
of the original purchase, although it may extend over a number of months. The
resale price is in excess of the purchase price, reflecting an agreed-upon rate
of return effective for the period of time the Fund's money is invested in the
security. The Fund's repurchase agreements will at all times be fully
collateralized in an amount at least equal to the purchase price including
accrued interest earned on the underlying securities. The instruments held as
collateral are valued daily, and as the value of instruments declines, the Fund
will require additional collateral. If the seller defaults and the value of the
collateral securing the repurchase agreement declines, the Fund may incur a
loss. The Fund participates in a joint repurchase account with other investment
companies managed by Prudential Mutual Fund Management, Inc. pursuant to an
order of the SEC. See "Additional Investment Information--Repurchase Agreements"
in the Statement of Additional Information.
REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLLS
The Fund may enter into reverse repurchase agreements and dollar rolls. The
proceeds from such transactions will be used for the clearance of transactions
or to take advantage of investment opportunities.
Reverse repurchase agreements involve sales by the Fund of securities
concurrently with an agreement by the Fund to repurchase the same assets at a
later date at a fixed price. During the reverse repurchase agreement period, the
Fund continues to receive principal and interest payments on these securities.
Dollar rolls involve sales by the Fund of securities for delivery in the
current month and a simultaneous contract to repurchase substantially similar
(same type and coupon) securities on a specified future date from the same
party. During the roll period, the Fund forgoes principal and interest paid on
the securities. The Fund is compensated by the difference between the current
sales price and the forward price for the future purchase (often referred to as
the "drop") as well as by the interest earned on the cash proceeds of the
initial sale. A "covered roll" is a specific type of dollar roll for which there
is an offsetting cash position or a cash equivalent security position which
matures on or before the forward settlement date of the dollar roll transaction.
The Fund will establish a segregated account with its Custodian in which it
will maintain cash, U.S. Government securities or other liquid high-grade debt
obligations equal in value to its obligations in respect of reverse repurchase
agreements and dollar rolls. Reverse repurchase agreements and dollar rolls
involve the risk that the market value of the securities retained by the Fund
may decline below the price of the securities the Fund has sold but is obligated
to repurchase under the agreement. In the event the buyer of securities under a
reverse repurchase agreement or dollar roll files for bankruptcy or becomes
insolvent, the Fund's use of the proceeds of the agreement may be restricted
pending a determination by the other party, or its trustee or receiver, whether
to enforce the Fund's obligation to repurchase the securities.
Reverse repurchase agreements and dollar rolls, including covered dollar
rolls, are speculative techniques involving leverage and are considered
borrowings by the Fund for purposes of the percentage limitations applicable to
borrowings. See "Borrowing" below.
SECURITIES LENDING
The Fund may lend its portfolio securities to brokers or dealers, banks or
other recognized institutional borrowers of securities, provided that the
borrower at all times maintains cash or equivalent collateral or secures a
letter of credit in favor of the Fund in an amount equal to at least 100% of the
market value of the securities loaned. During the time portfolio securities are
on loan, the borrower will pay the Fund an amount equivalent to any dividend or
interest paid on such securities and the Fund may invest the cash collateral and
earn additional income, or it may receive an agreed-upon amount of interest
income from the borrower. As a matter of fundamental policy, the Fund cannot
lend more than 30% of the value of its total assets.
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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 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.
BORROWING
The Fund may borrow money up to 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.
OTHER INVESTMENT INFORMATION
The Fund is permitted to purchase the following securities and to use the
following investment techniques, although it does not anticipate that any of
them will constitute a significant component of its investment program.
SHORT SALES AGAINST-THE-BOX
The Fund may make short sales against-the-box for the purpose of deferring
realization of gain or loss for federal income tax purposes. A short sale
"against-the-box" is a short sale in which the Fund owns an equal amount of the
securities sold short or securities convertible into or exchangeable, without
payment of any further consideration, for securities of the same issue as, and
equal in amount to, the securities sold short. The Fund may engage in such short
sales only to the extent that not more than 10% of the Fund's net assets
(determined at the time of the short sale) are held as collateral for such
sales.
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.
See "Additional Investment Information--Interest Rate Transactions" in the
Statement of Additional Information.
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), and privately placed commercial paper
that have a readily available market are not considered illiquid for purposes of
this limitation. The investment adviser will monitor the liquidity of such
restricted securities under the supervision of the Board of Directors.
Repurchase agreements subject to demand are deemed to have a maturity equal to
the applicable notice period.
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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."
When the Fund enters into interest rate swaps on other than a net basis, the
entire amount of the Fund's obligations, if any, with respect to such interest
rate swaps will be treated as illiquid. To the extent that the Fund enters into
interest rate swaps on a net basis, the net amount of the excess, if any, of the
Fund's obligations over its entitlements with respect to each interest rate swap
will be treated as illiquid. The Fund will also treat non-U.S. Government POs
and IOs as illiquid securities so long as the staff of the SEC maintains its
position that such securities are illiquid.
PORTFOLIO TURNOVER
For the years ended October 31, 1994 and October 31, 1993, the turnover rates
of the Fund's portfolio were 40% and 66%, respectively. Based on its experience
in managing similar investment products, the investment adviser expects that,
under normal circumstances, the Fund's portfolio turnover rate may exceed 200%.
A high portfolio turnover rate (over 100%) may involve correspondingly greater
brokerage commissions and other transaction costs. See "Portfolio Transactions
and Brokerage" in the Statement of Additional Information.
INVESTMENT RESTRICTIONS
The Fund is subject to certain investment restrictions which, like its
investment objective, constitute fundamental policies. Fundamental policies
cannot be changed without the approval of the holders of a majority of the
Fund's outstanding voting securities, as defined in the Investment Company Act.
See "Investment Restrictions" in the Statement of Additional Information.
HOW THE FUND IS MANAGED
THE TRUSTEES OF THE FUND, IN ADDITION TO OVERSEEING THE ACTIONS OF THE FUND'S
MANAGER, SUBADVISER AND DISTRIBUTOR, AS SET FORTH BELOW, DECIDE 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 October 31, 1994, the Fund's total expenses as a
percentage of average net assets for the Fund's Class A, Class B and Class C
shares were 1.09%, 1.75% and 1.82%, respectively. See "Financial Highlights."
MANAGER
PRUDENTIAL MUTUAL FUND MANAGEMENT, INC. (PMF OR THE MANAGER), ONE SEAPORT
PLAZA, NEW YORK, NEW YORK 10292, IS THE MANAGER OF THE FUND AND IS COMPENSATED
FOR ITS SERVICES AT AN ANNUAL RATE OF .50 OF 1% OF THE FUND'S AVERAGE DAILY NET
ASSETS. It was incorporated in May 1987 under the laws of the State of Delaware.
For the fiscal year ended October 31, 1994, the Fund paid management fees to PMF
of .50% of the Fund's average net assets.
As of November 30, 1994, PMF served as the manager to 38 open-end investment
companies, constituting all of the Prudential Mutual Funds, and as manager or
administrator to 30 closed-end investment companies with aggregate assets of
approximately $47 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.
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UNDER THE SUBADVISORY AGREEMENT BETWEEN PMF AND THE PRUDENTIAL INVESTMENT
CORPORATION (PIC OR THE SUBADVISER), PIC FURNISHES INVESTMENT ADVISORY SERVICES
IN CONNECTION WITH THE MANAGEMENT OF THE FUND AND IS REIMBURSED BY PMF FOR ITS
REASONABLE COSTS AND EXPENSES INCURRED IN PROVIDING SUCH SERVICES. Under the
Management Agreement, PMF continues to have responsibility for all investment
advisory services and supervises PIC's performance of such services.
The current portfolio manager of the Fund is Annamarie Carlucci, a Vice
President of Prudential Investment Advisors, a unit of The Prudential Investment
Corporation (PIC). Ms. Carlucci has responsibility for the day-to-day management
of the Fund's portfolio. Ms. Carlucci has managed the Fund's portfolio since
January 1991 and has been employed by PIC as a portfolio manager since 1988. Ms.
Carlucci also serves as the portfolio manager of the Prudential Structured
Maturity Fund, Prudential Series Fund Government Securities Portfolio,
Prudential Series Fund Bond Portfolio and Prudential Series Fund Zero Coupon
Portfolios.
PMF and PIC are 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.
PRUDENTIAL SECURITIES INCORPORATED, ONE SEAPORT PLAZA, NEW YORK, NEW YORK
10292 (PRUDENTIAL SECURITIES OR PSI), 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
representatives of 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
ACTIVITIES WITH RESPECT TO CLASS A SHARES AT AN ANNUAL RATE OF UP TO .30 OF 1%
OF THE AVERAGE DAILY NET ASSETS OF THE CLASS A SHARES. The Class A Plan provides
that (i) up to .25 of 1% of the average daily net assets of the Class A shares
may be used to pay for personal service and/ or the maintenance of shareholder
accounts (service fee) and (ii) total distribution fees (including the service
fee of .25 of 1%) may not exceed .30 of 1% of the average daily net assets of
the Class A shares. PMFD has agreed to limit its distribution-related
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fees payable under the Class A Plan to .15 of 1% of the average daily net assets
of the Class A shares for the fiscal year ending October 31, 1995.
For the fiscal year ended October 31, 1994, PMFD received payments of $10,639
under the Class A Plan. This amount was primarily expended for payment of
account servicing fees to financial advisers and other persons who sell Class A
shares. For the fiscal year ended October 31, 1994, PMFD also received
approximately $72,400 in initial sales charges.
UNDER THE CLASS B AND CLASS C PLANS, THE FUND MAY PAY PRUDENTIAL SECURITIES
FOR ITS DISTRIBUTION-RELATED ACTIVITIES WITH RESPECT TO CLASS B AND CLASS C
SHARES AT AN ANNUAL RATE OF UP TO 1% OF THE AVERAGE DAILY NET ASSETS OF 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 up to .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.
The Class C Plan provides for the payment to Prudential Securities of (i) an
asset-based sales charge of up to .75 of 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 B Plan to .85 of 1% of the average daily net assets of the Class B shares,
and 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 October 31, 1995. Prudential
Securities also receives contingent deferred sales charges from certain
redeeming shareholders. See "Shareholder Guide--How to Sell Your
Shares--Contingent Deferred Sales Charges."
For the fiscal year ended October 31, 1994, Prudential Securities incurred
distribution expenses of approximately $1,190,900 under the Class B Plan and
received $1,155,906 from the Fund under the Class B Plan, representing .81 of 1%
of average daily net assets. In addition, Prudential Securities received
approximately $446,200 in contingent deferred sales charges from redemptions of
Class B shares during this period.
For the period August 1, 1994 (commencement of operations of Class C shares)
through October 31, 1994, Prudential Securities incurred distribution expenses
of approximately $220 under the Class C Plan and received $42 from the Fund
under the Class C Plan. Prudential Securities did not receive any contingent
deferred sales charges from redemptions of Class C shares during this period.
For fiscal year ended October 31, 1994, the Fund paid distribution expenses of
.15%, .81% and .75% of the average daily net assets of the Class A, Class B and
Class C shares, respectively. The Fund records all payments made under the Plans
as expenses in the calculation of net investment income. Prior to August 1,
1994, the Class A and Class B Plans operated as "reimbursement type" plans and,
in the case of Class B, provided for the reimbursement of distribution expenses
incurred in current and prior years. See "Distributor" in the Statement of
Additional Information.
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 Trustees of the Fund, including a majority of the
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 the Plan or any agreement related to the Plan (the Rule 12b-1
Trustees), vote annually to continue the Plan. Each Plan may be terminated at
any time by vote of a majority of the Rule 12b-1 Trustees or of a majority of
the outstanding shares of the 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 out of its own resources to dealers and other persons who distribute
shares of the Fund. Such payments may be calculated by reference to the net
asset value of the shares sold by such persons or otherwise.
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The Distributor is subject to the rules of the National Association of
Securities Dealers, Inc. (the NASD), governing maximum sales charges. See
"Distributor" in the Statement of Additional Information.
On October 21, 1993, PSI entered into an omnibus settlement with the SEC,
state securities regulators (with the exception of the Texas Securities
Commissioner who joined the settlement on January 18, 1994) and the NASD to
resolve allegations that from 1980 through 1990 PSI sold certain limited
partnership interests in violation of securities laws to persons for whom such
securities were not suitable and misrepresented the safety, potential returns
and liquidity of these investments. Without admitting or denying the allegations
asserted against it, PSI consented to the entry of an SEC Administrative Order
which stated that PSI's conduct violated the federal securities laws, directed
PSI to cease and desist from violating the federal securities laws, pay civil
penalties, and adopt certain remedial to address the violations.
Pursuant to the terms of the SEC settlement, PSI agreed to the imposition of a
$10,000,000 civil penalty, established a settlement fund in the amount of
$330,000,000 and procedures to resolve legitimate claims for compensatory
damages by purchasers fo the partnership interests. PSI's settlement with the
state securities regulators included an agreement to pay a penalty of $500,000
per jurisdiction. PSI consented to a censure and to the payment of a $5,000,000
fine in settling the NASD action.
In October 1994, a criminal complaint was filed with the United States
Magistrate for the Southern District of New York alleging that PSI committed
fraud in connection with the sale of certain limited partnership interests in
violation of federal securities laws. An agreement was simultaneously filed to
defer prosecution of these charges for a period of three years from the signing
of the agreement, provided that PSI complies with the terms of the agreement.
If, upon completion of the three year period, PSI has complied with the terms of
the agreement, no prosecution will be instituted by the United States for the
offenses charged in the compliant. If on the other hand, during the course of
the three year period, PSI violated the terms of the agreement, the U.S.
Attorney can then elect to pursue these charges. Under the terms of the
agreement, PSI agreed, among other things, to pay an additional $330,000,000
into the fund established by the SEC to pay restitution to investors who
purchased certain PSI limited partnership interests.
For more detailed information concerning the foregoing matters, see
"Distributor" in the Statement of Additional Information, a copy of which may be
obtained at no cost by calling 1-800-225-1852.
The Fund is not affected by PSI's financial condition and is an entirely
separate legal entity from PSI, which has no beneficial ownership therein and
the Fund's assets which are held by State Street Bank & Trust Company, an
independent custodian, are separate and distinct from PSI.
PORTFOLIO TRANSACTIONS
Prudential Securities may act as a broker and/or futures commission merchant
for the Fund, provided that the commissions, fees or other remuneration it
receives are reasonable and fair. 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 02121, 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., 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.
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HOW THE FUND VALUES ITS SHARES
THE FUND'S NET ASSET VALUE OR NAV PER SHARE IS DETERMINED BY SUBTRACTING ITS
LIABILITIES FROM THE VALUE OF ITS ASSETS, AND DIVIDING THE REMAINDER BY THE
NUMBER OF OUTSTANDING SHARES OF THE FUND. NAV IS CALCULATED SEPARATELY FOR EACH
CLASS. THE TRUSTEES HAVE 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.
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 Trustees. 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. See "Net Asset Value" in the Statement of
Additional Information.
Although the legal rights of each class of shares are substantially identical,
the different expenses borne by each class will result in different NAVs and
dividends. 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 Fund's 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 annual" 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 performance information in advertising or
marketing. Such performance information may include data from Lipper Analytical
Services, Inc., Morningstar Publications, Inc., other industry publications,
business periodicals and market indices. See "Performance Information" in the
Statement of Additional Information. The Fund will include performance data for
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."
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TAXES, DIVIDENDS AND DISTRIBUTIONS
TAXATION OF THE FUND
THE FUND HAS ELECTED TO QUALIFY AND INTENDS TO REMAIN QUALIFIED AS A REGULATED
INVESTMENT COMPANY UNDER THE INTERNAL REVENUE CODE. ACCORDINGLY, THE FUND WILL
NOT BE SUBJECT TO FEDERAL INCOME TAXES ON ITS NET INVESTMENT INCOME AND CAPITAL
GAINS, IF ANY, THAT IT DISTRIBUTES TO ITS SHAREHOLDERS. See "Taxes" in the
Statement of Additional Information.
TAXATION OF SHAREHOLDERS
Any dividends out of net taxable investment income, together with
distributions of short-term gains (i.e., the excess of net short-term capital
gains over net long-term capital losses) distributed to shareholders, will be
taxable as ordinary income to the shareholder whether or not reinvested. Any net
capital gains (I.E., the excess of net long-term capital gains over net
short-term capital losses) distributed to shareholders will be taxable as
long-term capital gains to the shareholders, whether or not reinvested and
regardless of the length of time a shareholder has owned his or her shares. 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.
The Fund has obtained opinions of counsel to the effect that neither (i) the
conversion of Class B shares into Class A shares nor (ii) the exchange of Class
B or Class C shares for Class A shares constitutes a taxable event for federal
income tax purposes. However, such opinions are 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 is required to withhold and remit to
the U.S. Treasury 31% of dividends, capital gain income and redemption proceeds
paid 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) with the required certifications regarding the
shareholder's status under the federal income tax law. Notwithstanding the
foregoing, dividends of net investment income and short-term capital gains to a
foreign shareholder will generally be subject to U.S. withholding tax at the
rate of 30% (or lower treaty rate).
DIVIDENDS AND DISTRIBUTIONS
THE FUND EXPECTS TO DECLARE DIVIDENDS DAILY AND TO PAY DIVIDENDS OF NET
INVESTMENT INCOME, IF ANY, MONTHLY AND MAKE DISTRIBUTIONS AT LEAST ANNUALLY OF
ANY NET CAPITAL GAINS. As of October 31, 1994, the Fund has a capital loss
carryforward for federal income tax purposes of approximately $11,054,800.
Accordingly, no capital gains distribution is expected to be paid to
shareholders until net gains have been realized in excess of such carryforward.
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 charges, generally resulting in lower dividends for Class B
and Class C shares. Distributions of capital gains, if any, will be in the same
amount for each class of shares. See "How the Fund Values its Shares."
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Shares will begin earning daily dividends on the business day following the
settlement date. Shares continue to earn daily dividends until they are
redeemed. In the event an investor redeems all the shares in his or her account
at any time during the month, all daily dividends declared to the date of
redemption will be paid at the time of redemption.
DIVIDENDS AND DISTRIBUTIONS WILL BE PAID IN ADDITIONAL FUND SHARES, BASED ON
THE NET ASSET VALUE OF EACH CLASS ON THE PAYMENT DATE AND RECORD DATE,
RESPECTIVELY, OR SUCH OTHER DATE AS THE TRUSTEES MAY DETERMINE, UNLESS THE
SHAREHOLDER ELECTS IN WRITING NOT LESS THAN FIVE BUSINESS DAYS PRIOR TO THE
PAYMENT DATE TO RECEIVE SUCH DIVIDENDS AND DISTRIBUTIONS IN CASH. Such election
should be submitted to 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 both of the dollar amount and the taxable status of that year's
dividends and distributions on a per share basis.
WHEN THE FUND GOES "EX-DIVIDEND", ITS NAV IS REDUCED BY THE AMOUNT OF THE
DISTRIBUTION. 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 DISTRIBUTION AND A PORTION OF YOUR INVESTMENT WILL BE RETURNED
TO YOU AS A TAXABLE DISTRIBUTION. YOU SHOULD, THEREFORE, CONSIDER THE TIMING OF
DISTRIBUTIONS WHEN MAKING YOUR PURCHASES.
GENERAL INFORMATION
DESCRIPTION OF SHARES
THE FUND IS AN OPEN-END INVESTMENT COMPANY WHICH WAS ORGANIZED UNDER THE LAWS
OF MASSACHUSETTS ON SEPTEMBER 22, 1986 AS AN UNINCORPORATED BUSINESS TRUST, A
FORM OF ORGANIZATION THAT IS COMMONLY CALLED A MASSACHUSETTS BUSINESS TRUST. THE
FUND IS AUTHORIZED TO ISSUE AN UNLIMITED NUMBER OF SHARES, DIVIDED INTO THREE
CLASSES, DESIGNATED CLASS A, CLASS B AND CLASS C. Each class of shares
represents an interest in the same assets of the Fund and is identical in all
respects except that (i) each class 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 shares. Currently, the Fund is offering three classes, designated
Class A, Class B and Class C shares. Pursuant to the Fund's Declaration of
Trust, the Trustees may authorize the creation of additional series of shares
and classes within such series, with such preferences, privileges, limitations
and voting and dividend rights as the Trustees may determine.
The Trustees may increase or decrease the number of authorized shares. 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 "How to Sell Your
Shares." Each share of beneficial interest of each class is equal as to
earnings, assets and voting privileges; except as noted above, each class bears
the expenses related to the distribution of its shares. Except for the
conversion feature applicable to Class B shares, there are no conversion,
preemptive or other subscription rights. In the event of liquidation, each share
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 Trustees.
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THE FUND DOES NOT INTEND TO HOLD ANNUAL MEETINGS OF SHAREHOLDERS. 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 TRUSTEES OR TO TRANSACT ANY OTHER BUSINESS.
Under Massachusetts law, shareholders of a business trust may, under certain
circumstances, be held personally liable as partners for the obligations of the
Fund beyond the amount of their investment in the Fund, which is not the case
with a corporation. The Declaration of Trust of the Fund provides that
shareholders shall not be subject to any personal liability for the acts or
obligations of the Fund and that every written obligation, contract, instrument
or undertaking made by the Fund shall contain a provision to the effect that the
shareholders are not individually bound thereunder.
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) ATTENTION: INVESTMENT SERVICES, P.O.
BOX 15020, NEW BRUNSWICK, NEW JERSEY 08906-5020. 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 is $50. The minimum initial investment requirement is
waived for purchases of Class A shares effected through an exchange of Class B
shares of The BlackRock Government Income Trust. See "Shareholder Services."
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 share certificates.
The Fund reserves the right to reject any purchase order (including an
exchange into the Fund) or to suspend or modify the continuous offering of its
shares. See "How to Sell Your Shares."
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.
25
<PAGE>
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
U.S. Government Fund, 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 U.S. Government
Fund, 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.
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 (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 1% (Currently being Shares convert to Class A shares
charge or CDSC of 5% of the lesser of charged at a rate of approximately seven years after
the amount invested or the redemption .85 of 1%) 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 Shares"), 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.
26
<PAGE>
IN SELECTING A PURCHASE ALTERNATIVE, YOU SHOULD CONSIDER, AMONG OTHER THINGS,
(1) the length of time you expect to hold your investment, (2) the amount of any
applicable sales charge (whether imposed at the time of purchase or redemption)
and distribution-related fees, as noted above, (3) whether you qualify for any
reduction or waiver of any applicable sales charge, (4) the various exchange
privileges among the different classes of shares (see "How to Exchange Your
Shares" below) and (5) that Class B shares automatically convert to Class A
shares approximately seven years after purchase (see "Conversion Feature--Class
B Shares" below).
The following is provided to assist you in determining which method of
purchase best suits your individual circumstances and is based on current fees
and expenses being charged to the Fund:
If you intend to hold your investment in the Fund for less than 7 years and do
not qualify for a reduced sales charge on Class A shares, since Class A shares
are subject to a maximum initial sales charge of 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 7 years or more and do not qualify
for a reduced sales charge on Class A shares, since Class B shares convert to
Class A shares approximately 7 years after purchase and because all of your
money would be invested initially in the case of Class B shares, you should
consider purchasing Class B shares over either Class A or Class C shares.
If you qualify for a reduced sales charge on Class A shares, it may be more
advantageous for you to purchase Class A shares over either Class B or Class C
shares regardless of how long you intend to hold your investment. However,
unlike Class B and Class C shares, you would not have all of your money invested
initially because the sales charge on Class A shares is deducted at the time of
purchase.
If you do not qualify for a reduced sales charge on Class A shares and you
purchase Class B or Class C shares, you would have to hold your investment for
more than 5 years in the case of Class B shares and 6 years in the case of 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,
UNDER RIGHTS OF ACCUMULATION OR LETTERS OF INTENT, MUST BE FOR CLASS A SHARES.
SEE "REDUCTION AND 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>
$0 to $49,999 4.00% 4.17% 3.75%
$50,000 to $99,999 3.50 3.83 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* None 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
27
<PAGE>
acquired pursuant to the exchange privilege) may be aggregated to determine the
applicable reduction. See "Purchase and Redemption of Fund Shares--Reduction and
Waiver of Initial Sales Charges--Class A Shares" in the Statement of Additional
Information.
BENEFIT PLANS. Class A shares may be purchased at NAV, without payment of an
initial sales charge, by pension, profit-sharing or other employee benefit plans
qualified under Section 401 of the Internal Revenue Code and deferred
compensation and annuity plans under Sections 457 and 403(b)(7) of the Internal
Revenue Code (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 participants. In the case of Benefit Plans whose
accounts are held directly with the Transfer Agent or Prudential Securities and
for which the Transfer Agent or Prudential Securities does individual account
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. After a Benefit Plan qualifies to purchase Class A
shares at NAV, all subsequent purchases will be made at NAV.
OTHER WAIVERS. In addition, Class A shares may be purchased at NAV, through
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 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 commencement of the financial adviser's employment at Prudential
Securities, (ii) the purchase is made with proceeds of a redemption of shares of
any open-end, 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
acquired upon the reinvestment of dividends and distributions. See "Purchase and
Redemption of Fund Shares--Reduction and Waiver of Initial Sales Charges--Class
A Shares" in the Statement of Additional Information.
CLASS B AND CLASS C SHARES
The offering price of Class B and Class C shares for investors choosing one of
the deferred sales charge alternatives is the NAV 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."
HOW TO SELL YOUR SHARES
YOU CAN REDEEM SHARES OF THE FUND AT ANY TIME FOR CASH AT THE NAV PER SHARE
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.
28
<PAGE>
IF YOU HOLD SHARES OF THE FUND THROUGH PRUDENTIAL SECURITIES, YOU MUST REDEEM
YOUR SHARES BY CONTACTING YOUR PRUDENTIAL SECURITIES FINANCIAL ADVISER. IF YOU
HOLD SHARES IN NON-CERTIFICATE FORM, A WRITTEN REQUEST FOR REDEMPTION SIGNED BY
YOU EXACTLY AS THE ACCOUNT IS REGISTERED IS REQUIRED. IF YOU HOLD CERTIFICATES,
THE CERTIFICATES SIGNED IN THE NAME(S) SHOWN ON THE FACE OF THE CERTIFICATES,
MUST BE RECEIVED BY THE TRANSFER AGENT IN ORDER FOR THE REDEMPTION REQUEST TO BE
PROCESSED. IF REDEMPTION IS REQUESTED BY A CORPORATION, PARTNERSHIP, TRUST OR
FIDUCIARY, WRITTEN EVIDENCE OF AUTHORITY ACCEPTABLE TO THE TRANSFER AGENT MUST
BE SUBMITTED BEFORE SUCH REQUEST WILL BE ACCEPTED. All correspondence and
documents concerning redemptions should be sent to the Fund in care of its
Transfer Agent, Prudential Mutual Fund Services, Inc., Attention: Redemption
Services, P.O. Box 15010, New Brunswick, New Jersey 08906-5010.
If the proceeds of the redemption (a) exceed $50,000, (b) are to be paid to a
person other than the record owner, (c) are to be sent to an address other than
the address on the Transfer Agent's records, or (d) are to be paid to a
corporation, partnership, trust or fiduciary, the signature(s) on the redemption
request and on the certificates, if any, or stock power must be guaranteed by an
"eligible guarantor institution." An "eligible guarantor institution" includes
any bank, broker, dealer or credit union. The Transfer Agent reserves the right
to request additional information from, and make reasonable inquiries of, any
eligible guarantor institution. For clients of Prusec, a signature guarantee may
be obtained from the agency or office manager of most Prudential Insurance and
Financial Services or Prudential Preferred Financial Services offices.
PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE MADE BY CHECK WITHIN SEVEN
DAYS AFTER RECEIPT BY THE TRANSFER AGENT OF THE CERTIFICATE AND/OR WRITTEN
REQUEST EXCEPT AS INDICATED BELOW. IF YOU HOLD SHARES THROUGH PRUDENTIAL
SECURITIES, PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE CREDITED TO YOUR
PRUDENTIAL SECURITIES ACCOUNT, UNLESS YOU INDICATE OTHERWISE. SUCH PAYMENT MAY
BE POSTPONED OR THE RIGHT OF REDEMPTION SUSPENDED AT TIMES (A) WHEN THE NEW YORK
STOCK EXCHANGE IS CLOSED FOR OTHER THAN CUSTOMARY WEEKENDS AND HOLIDAYS, (B)
WHEN TRADING ON SUCH EXCHANGE IS RESTRICTED, (C) WHEN AN EMERGENCY EXISTS AS A
RESULT OF WHICH DISPOSAL BY THE FUND OF SECURITIES OWNED BY IT IS NOT REASONABLY
PRACTICABLE OR IT IS NOT REASONABLY PRACTICABLE FOR THE FUND FAIRLY TO DETERMINE
THE VALUE OF ITS NET ASSETS, OR (D) DURING ANY OTHER PERIOD WHEN THE 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 Trustees determine that it would be detrimental to
the best interests of the remaining shareholders of the Fund to make payment
wholly or partly in cash, the Fund may pay the redemption price in whole or in
part by a distribution in kind of securities from the investment portfolio of
the Fund, in lieu of cash, in conformity with applicable rules of the SEC.
Securities will be readily marketable and will be valued in the same manner as
in a regular redemption. See "How the Fund Values its Shares." If your shares
are redeemed in kind, you would incur transaction costs in converting the assets
into cash. The Fund, however, has elected to be governed by Rule 18f-1 under the
Investment Company Act, under which the Fund is obligated to redeem shares
solely in cash up to the lesser of $250,000 or 1% of the net asset value of the
Fund during any 90-day period for any one shareholder.
INVOLUNTARY REDEMPTION. In order to reduce expenses of the Fund, the Trustees
may redeem all of the shares of any shareholder, other than a shareholder which
is an IRA or other tax-deferred retirement plan, whose account has a 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
29
<PAGE>
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 Class B or Class C shares. You must notify the Fund's Transfer Agent, either
directly or through Prudential Securities or Prusec, at the time the repurchase
privilege is exercised that you are entitled to credit for the contingent
deferred sales charge previously paid. Exercise of the repurchase privilege will
generally not affect federal income tax treatment of any gain realized upon
redemption. If the redemption resulted in a loss, some or all of the loss,
depending on the amount reinvested, will not be allowed for federal income tax
purposes.
CONTINGENT DEFERRED SALES CHARGES
Redemptions of Class B shares will be subject to a contingent deferred sales
charge or CDSC declining from 5% to zero over a six-year period. Class C shares
redeemed within one year of purchase will be subject to a 1% CDSC. The CDSC will
be deducted from the redemption proceeds and reduce the amount paid to you. The
CDSC will be imposed on any redemption by you which reduces the current value of
your Class B or Class C shares to an amount which is lower than the amount of
all payments by you for shares during the preceding six years, in the case of
Class B shares, and one year, in the case of Class C shares. A CDSC will be
applied on the lesser of the original purchase price or the current value of the
shares being redeemed. Increases in the value of your shares or shares acquired
through reinvestment of dividends or distributions are not subject to a CDSC.
The amount of any contingent deferred sales charge will be paid to and retained
by the Distributor. See "How the Fund is Managed--Distributor" and "Waiver of
the Contingent Deferred Sales Charges--Class B Shares" below.
The amount of the CDSC, if any, will vary depending on the number of years
from the time of payment for the purchase of shares until the time of redemption
of such shares. Solely for purposes of determining the number of years from the
time of any payment for the purchase of shares, all payments during a month will
be aggregated and deemed to have been made on the last day of the month. The
CDSC will be calculated from the first day of the month after the initial
purchase, excluding the time shares were held in a money market fund. See "How
to Exchange Your Shares."
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
OF DOLLARS INVESTED OR
YEAR SINCE PURCHASE 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 shares purchased prior to January 22, 1990); then of amounts
representing the cost of shares held beyond the applicable CDSC period; and
finally, of amounts representing the cost of shares held for the longest period
of time within the applicable CDSC period.
For example, assume you purchased 100 Class B shares at $10 per share for a
cost of $1,000. Subsequently, you acquired 5 additional Class B shares through
dividend reinvestment. During the second year after the purchase you decided to
redeem $500 of your investment. Assuming at the time of the redemption the NAV
had appreciated to $12 per share, the value of your Class B
30
<PAGE>
shares would be $1,260 (105 shares at $12 per share). The CDSC would not be
applied to the value of the reinvested dividend shares and the amount which
represents appreciation ($260). Therefore, $240 of the $500 redemption proceeds
($500 minus $260) would be charged at a rate of 4% (the applicable rate in the
second year after purchase) for a total CDSC of $9.60.
For federal income tax purposes, the amount of the CDSC will reduce the gain
or increase the loss, as the case may be, on the amount recognized on the
redemption of shares.
WAIVER OF THE CONTINGENT DEFERRED SALES CHARGES--CLASS B SHARES. The CDSC will
be waived in the case of a redemption following the death or disability of a
shareholder or, in the case of a trust account, following the death or
disability of the grantor. The waiver is available for total or partial
redemptions of shares owned by a person, either individually or in joint tenancy
(with rights of survivorship), or a trust, at the time of death or initial
determination of disability, provided that the shares were purchased prior to
death or disability.
The CDSC will also be waived in the case of a total or partial redemption in
connection with certain distributions made without penalty under the Internal
Revenue Code from a tax-deferred retirement plan, an IRA or Section 403(b)
custodial account. These distributions include: (i) in the case of a
tax-deferred retirement plan, a lump-sum or other distribution after retirement;
(ii) in the case of an IRA or Section 403(b) custodial account, a lump-sum or
other distribution after attaining age 59 1/2; and (iii) a tax-free return of an
excess contribution or plan distributions following the death or disability of
the shareholder, provided that the shares were purchased prior to death or
disability. The waiver does not apply in the case of a tax-free rollover or
transfer of assets, other than one following a separation from service (I.E.,
following voluntary or involuntary termination of employment or following
retirement). Under no circumstances will the CDSC be waived on redemptions
resulting from the termination of a tax-deferred retirement plan, unless such
redemptions otherwise qualify for a waiver as described above. In the case of
Direct Account and PSI or Subsidiary Prototype Benefit Plans, the CDSC will be
waived on redemptions which represent borrowings from such plans. Shares
purchased with amounts used to repay a loan from such plans on which a CDSC was
not previously deducted will thereafter be subject to a CDSC without regard to
the time such amounts were previously invested. In the case of a 401(k) plan,
the CDSC will also be waived upon the redemption of shares purchased with
amounts used to repay loans made from the account to the participant and from
which a CDSC was previously deducted.
In addition, the CDSC will also be waived on redemptions of shares held by
Trustees 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 and provide the Transfer Agent with such supporting documentation as
it may deem appropriate. The waiver will be granted subject to confirmation of
your entitlement. See "Purchase and Redemption of Fund Shares--Waiver of the
Contingent Deferred Sales Charge--Class B Shares" in the Statement of Additional
Information.
A quantity discount may apply to redemptions of Class B shares purchased prior
to August 1, 1994. See "Purchase and Redemption of Fund Shares--Quantity
Discount--Class B Shares Purchased prior to August 1, 1994" in the Statement of
Additional Information.
CONVERSION FEATURE--CLASS B SHARES
Class B shares will automatically convert to Class A shares on a quarterly
basis approximately seven years after purchase. It is currently anticipated that
conversions will occur during the months of February, May, August and November
commencing in or about February 1995. Conversions will be effected at relative
net asset value without the imposition of any additional sales charge.
Since the Fund tracks amounts paid rather than the number of shares bought on
each purchase of Class B shares, the number of Class B shares eligible to
convert to Class A shares (excluding shares acquired through the automatic
reinvestment of dividends and other distributions) (the Eligible Shares) will be
determined on each conversion date in accordance with the following formula: (i)
the ratio of (a) the amounts paid for Class B shares purchased at least seven
years prior to the conversion date to (b) the total amount paid for all Class B
shares purchased and then held in your account (ii) multiplied by the total
number of Class B shares purchased and then held in your account. Each time any
Eligible Shares in your account convert to Class A
31
<PAGE>
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 such shares. The
conversion feature described above will not be implemented and, consequently,
the first conversion of Class B shares will not occur before February, 1995, but
as soon thereafter as practicable. 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 (i) that 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) that the conversion of shares does not constitute a taxable event. The
conversion of Class B shares into Class A shares may be suspended if such
opinions or rulings are no longer available. If conversions are suspended, Class
B shares of the Fund will continue to be subject, possibly indefinitely, to
their higher annual distribution and service fee.
HOW TO EXCHANGE YOUR SHARES
AS A SHAREHOLDER OF THE FUND, YOU HAVE AN EXCHANGE PRIVILEGE WITH CERTAIN
OTHER PRUDENTIAL MUTUAL FUNDS, 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.
No sales charge will be imposed at the time of the exchange. Any applicable CDSC
payable upon the redemption of shares exchanged will be that imposed by the Fund
in which shares were initially purchased and 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. 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.
32
<PAGE>
IN ORDER TO EXCHANGE SHARES BY TELEPHONE, YOU MUST AUTHORIZE THE TELEPHONE
EXCHANGE PRIVILEGE ON YOUR INITIAL APPLICATION FORM OR BY WRITTEN NOTICE TO THE
TRANSFER AGENT AND HOLD SHARES IN NON-CERTIFICATE FORM. Thereafter you may call
the Fund at (800) 225-1852 to execute a telephone exchange of shares, weekdays,
except holidays, between the hours of 8:00 a.m. and 6:00 p.m., New York time.
For your protection and to prevent fraudulent exchanges, your telephone call
will be recorded and you will be asked to provide your personal identification
number. A written confirmation of the exchange transaction will be sent to you.
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 MAY 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."
You may also exchange shares by mail by writing to Prudential Mutual Fund
Services, Inc., Attention: Exchange Processing, P.O. Box 15010, New Brunswick,
New Jersey 08906-5010.
IN PERIODS OF SEVERE MARKET OR ECONOMIC CONDITIONS THE TELEPHONE EXCHANGE OF
SHARES MAY BE DIFFICULT TO IMPLEMENT AND YOU SHOULD MAKE EXCHANGES BY MAIL BY
WRITING TO PRUDENTIAL MUTUAL FUND SERVICES, INC., AT THE ADDRESS NOTED ABOVE.
SPECIAL EXCHANGE PRIVILEGE. Commencing in or about February 1995, a special
exchange privilege is available for shareholders who qualify to purchase Class A
shares at NAV. See "Alternative Purchase Plan--Class A Shares--Reduction and
Waiver of Initial Sales Charges" above. Under this exchange privilege, amounts
representing any Class B and Class C shares (which are not subject to a CDSC)
held in such a shareholders' account will be automatically exchanged for Class A
shares on a quarterly basis, unless the shareholder elects otherwise. It is
currently anticipated that this exchange will occur quarterly in February, May,
August and November. Eligibility for this exchange privilege will be calculated
on the business day prior to the date of the exchange. Amounts representing
Class B or Class C shares which are not subject to a CDSC include the following:
(1) amounts representing Class B or Class C shares acquired pursuant to the
automatic reinvestment of dividends and distributions, (2) amounts representing
the increase in the net asset value above the total amount of payments for the
purchase of Class B or Class C shares and (3) amounts representing Class B or
Class C shares held beyond the applicable CDSC period. Class B and Class C
shareholders must notify the Transfer Agent either directly or through
Prudential Securities or Prusec that they are eligible for this special exchange
privilege.
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 or 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 $50 via an automatic
debit to a bank account or Prudential Securities account (including a Command
33
<PAGE>
Account). For additional information about this service, you may contact your
Prudential Securities financial adviser, Prusec representative or the Transfer
Agent directly.
- TAX-DEFERRED RETIREMENT PLANS. Various tax-deferred retirement plans,
including a 401(k) plan, self-directed individual retirement accounts and
"tax-sheltered accounts" under Section 403(b)(7) of the Internal Revenue Code
are available through the Distributor. These plans are for use by both
self-employed individuals and corporate employers. These plans permit either
self-direction of accounts by participants, or a pooled account arrangement.
Information regarding the establishment of these plans, the administration,
custodial fees and other details is available from Prudential Securities or the
Transfer Agent. If you are considering adopting such a plan, you should consult
with your own legal or tax adviser with respect to the establishment and
maintenance of such a plan.
- SYSTEMATIC WITHDRAWAL PLAN. A systematic withdrawal plan is available to
shareholders which provides for monthly or quarterly checks in any amount, not
less than $100 (which amount is not necessarily recommended). Withdrawals of
Class B and Class C shares may be subject to a CDSC. See "How to Sell Your
Shares--Contingent Deferred Sales Charges."
- REPORTS TO SHAREHOLDERS. The Fund will send you annual and semi-annual
reports. The financial statements appearing in annual reports are audited by
independent accountants. In order to reduce duplicate mailing and printing
expenses, the Fund will provide one annual and semi-annual shareholder report
and annual prospectus per household. You 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
is available from the Fund upon request.
- SHAREHOLDER INQUIRIES. Shareholder 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.
34
<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 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
Hawaii Income Series
Maryland Series
Massachusetts Series
Michigan Series
Minnesota Series
New Jersey Series
New York Series
North Carolina Series
Ohio Series
Pennsylvania Series
Prudential National Municipals Fund, Inc.
Global Funds
Prudential Europe Growth Fund, Inc.
Prudential Global Fund, Inc.
Prudential Global Genesis Fund, Inc.
Prudential Global Natural Resources Fund, Inc.
Prudential Intermediate Global Income Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Prudential Short-Term Global Income Fund, Inc.
Global Assets Portfolio
Short-Term Global Income Portfolio
Global Utility Fund, Inc.
Equity Funds
Prudential Allocation Fund
Conservatively Managed Portfolio
Strategy Portfolio
Prudential Equity Fund, Inc.
Prudential Equity Income Fund
Prudential Growth Opportunity Fund, Inc.
Prudential IncomeVertible-Registered Trademark- 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 Securities 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
Risk Factors and Special Characteristics........................... 2
FUND EXPENSES........................................................ 4
FINANCIAL HIGHLIGHTS................................................. 5
HOW THE FUND INVESTS................................................. 8
Investment Objective and Policies.................................. 8
Other Investments and Policies..................................... 9
Other Investment Information....................................... 15
Investment Restrictions............................................ 16
HOW THE FUND IS MANAGED.............................................. 17
Manager............................................................ 17
Distributor........................................................ 17
Portfolio Transactions............................................. 20
Custodian and Transfer and Dividend Disbursing Agent............... 20
HOW THE FUND VALUES ITS SHARES....................................... 20
HOW THE FUND CALCULATES PERFORMANCE.................................. 21
TAXES, DIVIDENDS AND DISTRIBUTIONS................................... 21
GENERAL INFORMATION.................................................. 23
Description of Common Stock........................................ 23
Additional Information............................................. 23
SHAREHOLDER GUIDE.................................................... 24
How to Buy Shares of the Fund...................................... 24
Alternative Purchase Plan.......................................... 25
How to Sell Your Shares............................................ 27
Conversion Feature--Class B Shares................................. 30
How to Exchange Your Shares........................................ 31
Shareholder Services............................................... 32
THE PRUDENTIAL MUTUAL FUND FAMILY.................................... A-1
</TABLE>
- -------------------------------------------
MF128A 4440464
Class A: 744339-10-2
CUSIP Nos.: Class B: 744339-20-1
Class C: 744339-30-0
Prudential
Government Income
Fund, Inc.
Prudential Mutual Funds
Building Your Future On Our Strength
Prospectus -- May 1, 1995
- -------------------------------------------
<PAGE>
PRUDENTIAL MUTUAL FUNDS
Supplement dated May 5, 1995
The following information supplements the Prospectus of each of the Funds
listed below.
SHAREHOLDER GUIDE
ALTERNATIVE PURCHASE PLAN
CLASS A SHARES--REDUCTION AND WAIVER OF INITIAL SALES CHARGES
OTHER WAIVERS. Class A shares may be purchased at NAV, through Prudential
Securities or the Transfer Agent, by investors who have a business relationship
with a financial adviser who joined Prudential Securities from another
investment firm, provided that (i) the purchase is made within 90 days of the
commencement of the financial adviser's employment at Prudential Securities,
(ii) the purchase is made with proceeds of a redemption of shares of any open-
end, non-money market fund sponsored by the financial adviser's previous
employer (other than a fund which imposes a distribution or service fee .25 of
1% or less) and (iii) the financial adviser served as the client's broker on the
previous purchase.
HOW TO SELL YOUR SHARES
90-DAY REPURCHASE PRIVILEGE. If you redeem your shares and have not
previously exercised the repurchase privilege, you may reinvest any portion or
all of the proceeds of such redemption in shares of the Fund at the NAV next
determined after the order is received, which must be within 90 days after the
date of the redemption. No sales charge will apply to such repurchases. You
will receive PRO RATA credit for any contingent deferred sales charge paid in
connection with the redemption of Class B or Class C shares. You must notify
the Fund's Transfer Agent, either directly or through Prudential Securities or
Prusec, at the time the repurchase privilege is exercised that you are entitled
to credit for the contingent deferred sales charge previously paid. Exercise of
the repurchase privilege will generally not effect federal 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.
<PAGE>
Listed below are the names of the Prudential Mutual Funds and the dates of
the Prospectuses to which this supplement relates.
NAME OF FUND PROSPECTUS DATE
------------ ---------------
Prudential Adjustable Rate Securities Fund, Inc. May 1, 1994
Prudential Allocation Fund September 29, 1994
Prudential California Municipal Fund
California Income Series December 30, 1994
California Series December 30, 1994
Prudential Equity Income Fund December 30, 1994
Prudential Global Fund, Inc. January 3, 1995
Prudential Global Genesis Fund, Inc. August 1, 1994
Prudential Global Natural Resources Fund, Inc. August 1, 1994
Prudential Multi-Sector Fund, Inc. August 1, 1994
Prudential Municipal Bond Fund August 1, 1994
Prudential Municipal Series Fund
Arizona Series December 30, 1994
Florida Series December 30, 1994
Georgia Series December 30, 1994
Maryland Series December 30, 1994
Massachusetts Series December 30, 1994
Michigan Series December 30, 1994
Minnesota Series December 30, 1994
New Jersey Series December 30, 1994
New York Series December 30, 1994
North Carolina Series December 30, 1994
Ohio Series December 30, 1994
Pennsylvania Series December 30, 1994
Prudential Pacific Growth Fund, Inc. January 3, 1995
Prudential Short-Term Global Income Fund, Inc.
Global Assets Portfolio January 3, 1995
Short-Term Global Income Fund January 3, 1995
Prudential Strategist Fund, Inc. August 1, 1994
Prudential U.S. Government Fund January 3, 1995
The BlackRock Government Income Trust November 1,1994
(as supplemented
December 30, 1994)
<PAGE>
PRUDENTIAL U.S. GOVERNMENT FUND
Supplement dated May 12, 1995 to
Prospectus dated January 3, 1995
HOW THE FUND IS MANAGED
MANAGER
Effective May 5, 1995, Barbara L. Kenworthy, a managing director and senior
portfolio manager of Prudential Investment Advisors, a unit of The Prudential
Investment Corporation (PIC), has been named portfolio manager of the Fund. She
is responsible for the day-to-day management of the portfolio. Ms. Kenworthy
joined PIC in July 1994, having previously been employed by The Dreyfus
Corporation (from June 1985 to June 1994) where she served as president and
portfolio manager for several Dreyfus fixed-income funds. Ms. Kenworthy also
serves as the portfolio manager of other investment companies advised by PIC.
<PAGE>
PRUDENTIAL MUTUAL FUNDS
Supplement dated July 3, 1995
The following information supplements the prospectuses of each of the Funds
listed on the reverse.
SHAREHOLDER GUIDE
HOW TO BUY SHARES OF THE FUND
REDUCTION AND WAIVER OF INITIAL SALES CHARGES.
PRUARRAY PLANS. Class A shares may be purchased at NAV by certain
retirement and deferred compensation plans, qualified or non-qualified under the
Internal Revenue Code of 1986, as amended, (the Code), including pension,
profit-sharing, stock-bonus or other employee benefit plans under Section 401 of
the Code and deferred compensation and annuity plans under Sections 457 and
403(b)(7) of the Code that participate in the Transfer Agent's PruArray Program
(a benefit plan record keeping service) (hereafter referred to as a PruArray
Plan); provided (i) that the plan has at least $1 million in existing assets or
1,000 eligible employees or participants and (ii) that Prudential Mutual Funds
constitute at least one-half of the plan's investment options. The term
"existing assets" for this purpose includes stock issued by a PruArray Plan
sponsor and shares of non-money market Prudential Mutual Funds and shares of
certain unaffiliated non-money market mutual funds that participate in the
PruArray Program (Participating Funds). "Existing assets" also include shares
of money market funds acquired by exchange from a Participating Fund. After a
PruArray Plan qualifies to purchase Class A shares at NAV, all subsequent
purchases will be made at NAV.
<PAGE>
Listed below are the names of the Prudential Mutual Funds and the dates of
the prospectuses to which this supplement relates.
NAME OF FUND PROSPECTUS DATE
------------ ---------------
Prudential Adjustable Rate Securities Fund, Inc. June 26, 1995
Prudential Allocation Fund September 29, 1994
Prudential Diversified Bond Fund, Inc. January 3, 1995
(as supplemented
June 20, 1995)
Prudential Equity Fund, Inc. February 28, 1995
Prudential Equity Income Fund December 30, 1994
Prudential Global Fund, Inc. January 3, 1995
Prudential Global Genesis Fund, Inc. August 1, 1994
Prudential Global Natural Resources Fund, Inc. August 1, 1994
Prudential GNMA Fund, Inc. March 2, 1995
Prudential Government Income Fund, Inc. May 1, 1995
Prudential Growth Opportunity Fund, Inc. February 1, 1995
Prudential High Yield Fund, Inc. February 28, 1995
Prudential IncomeVertible Fund, Inc. March 1, 1995
Prudential Intermediate Global Income Fund, Inc. March 2, 1995
Prudential Multi-Sector Fund, Inc. June 30, 1995
Prudential Pacific Growth Fund, Inc. January 3, 1995
Prudential Short-Term Global Income Fund, Inc.
Global Assets Portfolio January 3, 1995
Short-Term Global Income Fund January 3, 1995
Prudential Structured Maturity Fund, Inc. March 1, 1995
Prudential U.S. Government Fund January 3, 1995
Prudential Utility Fund, Inc. March 1, 1995
The BlackRock Government Income Trust November 1, 1994
(as supplemented
December 30, 1994)
Global Utility Fund, Inc. February 1, 1995
Nicholas-Applegate Fund, Inc. March 6, 1995
<PAGE>
PRUDENTIAL U.S. GOVERNMENT FUND
Supplement dated October 2, 1995
to Prospectus dated January 3, 1995
The Trustees of Prudential U.S. Government Fund (the Fund) have recently
approved a proposal to sell the Fund's assets and liabilities for shares of the
Prudential Government Income Fund, Inc. Class A, Class B and Class C shares of
the Fund would be exchanged at net asset value for Class A, Class B and Class C
shares, respectively, of equivalent value of Prudential Government Income Fund,
Inc.
The transaction has also been approved by the Prudential Government Income
Fund, Inc. Board of Directors and is subject to approval by the U.S. Government
Fund's shareholders. It is anticipated that the proxy statement/prospectus
relating to the proposed transaction will be mailed to Fund shareholders in
November 1995.
Under the terms of the proposal, Fund shareholders would become
shareholders of Prudential Government Income Fund, Inc. No sales charges would
be imposed on the proposed transfer. The Fund anticipates obtaining an opinion
of its counsel that no gain or loss for federal income tax purposes would be
recognized by Fund shareholders as a result of the proposed transaction.
EFFECTIVE IMMEDIATELY, THE FUND WILL NO LONGER ACCEPT PURCHASE ORDERS FOR
ITS CLASS A, CLASS B OR CLASS C SHARES, EXCEPT FOR PURCHASES BY CERTAIN
RETIREMENT AND EMPLOYEE PLANS (EXCLUDING IRA ACCOUNTS). EXISTING SHAREHOLDERS
MAY CONTINUE TO ACQUIRE SHARES THROUGH DIVIDEND REINVESTMENT. THE CURRENT
EXCHANGE PRIVILEGE OF OBTAINING SHARES OF OTHER PRUDENTIAL MUTUAL FUNDS AND THE
CURRENT REDEMPTION PRIVILEGE FOR FUND SHAREHOLDERS WILL REMAIN IN EFFECT.
NOTWITHSTANDING THE ABOVE EXCEPTIONS, NO SHARES MAY BE ACQUIRED BY ANY MEANS
BEGINNING FOUR DAYS PRIOR TO THE DATE OF CLOSING OF THE PROPOSED REORGANIZATION.
Prudential Government Income Fund, Inc.'s investment objective is to seek a
high current return. There can be no assurance that the fund will achieve its
investment objective.
<PAGE>
Exhibit 17(G)
Letter to Shareholders
April 3, 1995
Dear Shareholder:
U.S. government bond investors faced a difficult year in 1994. First,
interest rates rose -- driven by accelerating inflation -- and bond prices
dropped. In the fourth quarter bonds rebounded, however, as investors
began to believe that economic growth was not out-of-control after all.
In the first two months of 1995, however, sentiment reversed course, rates
fell and bond prices recovered some of their losses. In such a turbulent
year, we're pleased to announce that the Prudential Government Income Fund
produced higher total returns than the average U.S. government bond fund,
as reported by Lipper Analytical Services Inc.
<TABLE>
CUMULATIVE TOTAL RETURNS1
As of February 28, 1995
<CAPTION>
One Year Five Years Since Inception2
<S> <C> <C> <C>
Class A 0.8% 45.8% 45.0%
Class B 0.2% 40.3% 108.6%
Class C N/A N/A 2.8%
Lipper
U.S. Government Avg. -0.1% 44.6% 126.9%
</TABLE>
<TABLE>
AVERAGE ANNUAL TOTAL RETURNS1
As of March 31, 1995
<CAPTION>
One Year Five Years Since Inception2
<S> <C> <C> <C>
Class A 0.0% 7.1% 6.7%
Class B -1.4% 7.0% 7.7%
Class C N/A N/A 2.3%
</TABLE>
An investment in the Fund is neither insured nor guaranteed by the U.S.
government. Past performance is no guarantee of future results. Investment
return and principal value will fluctuate so an investor's shares, when
redeemed, may be worth more or less than their original cost.
1 Source: Prudential Mutual Fund Management, Inc. and Lipper Analytical
Services Inc.. The cumulative total returns do not take into account sales
charges. The average annual total returns do take into account sales
charges. The Fund charges a maximum sales load of 4% for Class A shares.
Class B shares are subject to a contingent deferred sales charge of 5%, 4%,
3%, 2%, 1% and 1%, respectively, for six years. Class C shares charge a CDSC
of 1% for one year. Class B shares will automatically convert to Class A
shares on a quarterly basis, approximately seven years after purchase.
2 Inception dates: Class A 1/22/90, Class B 4/22/85; Class C 8/1/94.
The Fund paid dividends totaling $0.59 for Class A shares, $0.53 for Class B
shares and $0.31 forClass C shares, in the year ended February 28, 1995.
-1-
<PAGE>
Our Objective.
The Prudential Government Income Fund seeks to provide high current return
by investing in U.S. Treasury securities and obligations issued or guaranteed
by U.S. government agencies or instrumentalities. Of course, there is no
assurance the Fund will meet this objective. The Fund may also invest in
derivative securities, like put and call options. See the prospectus for
more information about the range of securities purchased by the Fund.
Inflationary Fears Subside.
Investors have been looking for higher inflation for more than 12 months, but
it appears at this writing that the Federal Reserve has been successful in
slowing the economic engine without sending it into a stall. This may be
the "soft landing" economists have been looking for; economic growth has
slowed to around 4% and inflation remains below 3% with no signs of rising
any time soon. The Consumer Price Index (one measure of inflation) has
remained in a range throughout the year, and wages (another leading
indicator) have stayed flat. We've charted their progress here, and while
they appeared to be on the verge of breaking into the danger zone at several
points in the past year, both indicators remain in a manageable range. With
economic growth slowing, we don't expect wage or price pressures to develop
any time soon.
(CHART)
-2-
<PAGE>
(CHART)
The cost of the Federal Reserve's successful campaign to slow growth and
forestall inflation was steep for government bond investors in 1994. The
early 1995 rally helped recoup all losses, however, and the average U.S.
government bond's total return is up 1.3% for the year, as measured by the
Lehman government average. Mortgages were resilient, gaining 2.8% in 12
months. Long-term bonds did not fare as well: Lehman registers a loss of
0.8% for the average long-term U.S. government bond.
Good Moves:
Assuming A Cautious Stance.
We're glad we shortened the average maturity of the portfolio by raising cash
throughout most of the year. Cash doesn't fluctuate in price the way bonds
do when interest rates are on the move. We earned a little less coupon income
with cash at a 6% level, as it was at midyear, but we also built in a nice
cushion of stability while the Federal Reserve raised interest rates every
month. Late in 1994, we shifted the bulk of that cash back into bonds,
believing that the market was poised for a rally. Cash stood at 7.7% of
total assets on February 28 and the effective maturity was about 8.7 years.
Our maturities, as measured by duration, stood at 5.5 years when we last
wrote (duration measures a bond fund's sensitivity to interest rate changes
by calculating the average weighted time it would take the entire portfolio
to mature) and it rose to 6.0 years at the close of the reporting period.
We anticipate the Fund's duration will continue to fluctuate as we respond
to changing market conditions.
-3-
<PAGE>
Trading Mortgages.
The Fund's mortgage component, at 42% of assets, is also somewhat below
it's normal level -- we like to keep about 50% of total net assets in mortgage
backed securities to take advantage of their coupons. In a bond market rally,
however, mortgages generally don't perform as well as Treasury securities
because their repayment schedules are variable.
Fund Update
Starting in February 1995, Class B shareholders
may have begun to notice a change in their Fund
holdings. That's when Class B shares began to
automatically convert to Class A shares, on a
quarterly basis, approximately seven years after
purchase. As you may know, Class A shares generally
carry lower annual distribution expenses than Class B
shares. Accordingly, after conversion you will
earn higher total returns on your investment than
you would have as a Class B shareholder.
Following the May cycle, conversions of eligible
Class B shares and special exchanges of Class B
and C shares will take place each calendar quarter
(March, June, September and December) starting
in September 1995.
Looking Forward.
In 1995, bond market performance will be heavily impacted by economic
reports -- but we believe bonds are the asset class of choice this year.
Investors will probably "clip coupons," earning at least that rate and
possibly a bit more in price appreciation. Many investors had become too
bearish on bonds at the end of 1994, and buyers spurred a healthy early-1995
rally. But once investor sentiment wanes and the rally slows, prices will
probably become volatile. We will monitor the markets carefully and attempt
to adjust the portfolio to maintain competitive returns.
Thank you for your confidence in us. We are committed to managing the
Prudential Government Income Fund for your long-term benefit.
Sincerely,
/s/ Lawrence C. McQuade
Lawrence C. McQuade
President
/s/ Barbara Kenworthy
Barbara Kenworthy
Portfolio Manager
-4-
<PAGE>
PORTFOLIO Q&A
(PICTURE)
Dennis Bushe
Many investors avoided bond funds in the past year, fearing that rising
interest rates would erode their returns and add volatility to their
investment portfolio. If you are contemplating putting cash into the bond
market -- in taxable or tax-exempt securities -- you might want to consider
some of the following points. We talked with Prudential Mutual Funds
chief fixed income strategist Dennis Bushe about why bonds and bond mutual
funds may make sense in today's investment environment.
Q. Why are bonds an attractive buy right now?
A. First, bond prices corrected in 1994, which put interest rates at very
attractive levels in 1995. Second, real rates of return (the interest rate
minus the inflation rate) are still very high historically. According to
Ibbotson Associates, a nationally recognized investment analysis firm, the
annual inflation-adjusted return on bonds from 1926 to 1994 was between 2.5%
and 3.0%. Today's investors receive over 4.5% in total inflation-adjusted,
annualized total return. Of course, these numbers are just for illustration,
but they show how much higher interest rates improve bond total returns when
inflation is only 2.7%, as measured by the Consumer Price Index. And beating
inflation is one primary goal of long-term investing.
Q. Why not buy short-term bonds to reduce price risk?
A. Short-term investing is appropriate for money you believe you will need
to use within the next six to eighteen months. But this may not be the case
for money you don't plan to touch for a while. When investors can receive
virtually the same amount of yield for investing in a two-year note or a
10-year note, it's tempting to buy only the two-year security and avoid
the risk of longer term investing. By doing so, however, you may give up
the opportunity to lock in attractive intermediate- and long-term interest
rates. Why? If rates remain flat, long-term bonds pay higher coupons
and produce higher total returns. If rates fall, long-term bonds will
produce better price gains, as well. And long-term investors avoid the
scramble to reinvest maturing bonds when interest rates are falling. So,
unless you believe interest rates will rise rapidly in the coming year, it
may be time to lengthen maturities.
-5-
<PAGE>
PRUDENTIAL GOVERNMENT INCOME FUND Portfolio of Investments
February 28, 1995
<TABLE>
<CAPTION>
Principal
Amount Value
(000) Description (Note 1)
<C> <S> <C>
LONG-TERM INVESTMENTS--95.2%
U.S. Government Agency
Securities--46.9%
Federal Home Loan Mortgage
Corp.,
$ 81,913 8.00%, 1/01/22 - 9/01/24... $ 81,401,413
50,000 8.20%, 1/16/98............. 51,187,500
7,821 8.50%, 6/01/07 - 4/01/20... 7,888,122
3,993 11.50%, 10/01/19........... 4,302,276
Federal National Mortgage
Assoc.,
6.50%, 10/01/23 -
25,525 6/01/24.................. 23,370,929
7.00%, 11/01/23 -
55,769# 5/01/24.................. 52,631,903
89,285 7.50%, 5/01/07 - 3/01/25... 87,487,955
20,000 7.93%, 2/14/25............. 19,801,600
55,000 8.50%, 6/01/17 - 3/01/25... 55,691,196
Trust 1991 G-37 Class C,
42 (I/O*)................... 379,303
Government National Mortgage Assoc.,
6.50%, 5/15/23 -
58,718 10/15/24................. 53,084,682
7.00%, 2/15/09 -
72,648 11/15/24................. 68,039,509
3,718 7.25%, 7/15/23............. 3,452,263
35,152 7.50%, 5/15/02 - 2/15/25... 34,000,816
48,397 8.00%, 7/15/16 - 3/15/24... 48,485,100
57 8.50%, 5/15/22 - 2/15/25... 58,328
96,512 9.00%, 4/15/01 - 1/15/17... 100,712,486
9.50%, 7/15/16 -
31,392 12/15/17................. 33,256,201
Government National Mortgage Assoc. II,
6,689 9.50%, 5/20/18 - 8/20/21... 6,977,674
Resolution Funding Corp.,
50,000 Zero Coupon, 7/15/20....... 6,932,000
--------------
Total U.S. Government
Agency
Securities (cost
$738,288,900)............ 739,141,256
--------------
U.S. Government Obligations--45.3%
United States Treasury
Bonds,
$ 1,400 7.625%, 2/15/25............ $ 1,427,566
104,500 11.25%, 2/15/15............ 143,834,845
68,000 12.00%, 8/15/13............ 93,542,160
50,000 12.50%, 8/15/14............ 71,765,500
111,500D 14.00%, 11/15/11........... 168,591,345
United States Treasury
Notes,
50,000D 6.00%, 11/30/97............ 48,898,500
20,000 7.375%, 5/15/96............ 20,168,800
45,000 7.50%, 2/15/05............. 45,900,000
75,000D 8.25%, 7/15/98............. 77,883,000
United States Treasury
Strips,
37,600 Zero Coupon, 5/15/15....... 6,780,784
37,600 Zero Coupon, 5/15/16....... 6,235,960
200,000 Zero Coupon, 5/15/20....... 29,384,000
--------------
Total U.S. Government
Obligations
(cost $716,957,042)........ 714,412,460
--------------
Asset-Backed Securities--2.6%
Standard Credit Card Master
Trust I,
Series 1995 -1A, 8.25%,
1/07/07
40,000 (cost $40,312,500)....... 41,381,250
--------------
Adjustable Rate Mortgage
Pass-Throughs--0.4%
Ryland Mortgage Securities Corporation,
Mortgage Participation Securities,
Series 1993-3, Class A-3,
7.199%, 9/25/24
5,948 (cost $6,066,583)........ 5,893,742
--------------
Total long-term investments
(cost $1,501,625,025)...... 1,500,828,708
--------------
</TABLE>
-6- See Notes to Financial Statements.
<PAGE>
PRUDENTIAL GOVERNMENT INCOME FUND
<TABLE>
<CAPTION>
Principal
Amount Value
(000) Description (Note 1)
<C> <S> <C>
SHORT-TERM INVESTMENTS--8.5%
Time Deposit--5.0%
Fuji Bank Chicago,
6.125%, 3/01/95
$ 78,465 (cost $78,465,000)....... $ 78,465,000
--------------
Repurchase AgreementDD--1.6%
First Boston Corp.,
6.00%, dated 2/28/95, due
3/07/95 in the amount of
$25,644,640
(cost $25,632,000; the
value of collateral
including accrued
interest is
25,632 $26,242,803)............. 25,632,000
--------------
U.S. Government Obligation--1.3%
United States Treasury
Note,
11.25%, 5/15/95
20,000 (cost $20,209,400)......... 20,209,400
--------------
Commercial Paper--0.6%
Societe General,
6.00%, 3/01/95
10,000 (cost $10,000,000)....... 10,000,000
--------------
Total short-term
investments
(cost $134,306,400)........ 134,306,400
--------------
Total Investments--103.7%
(cost $1,635,931,425; Note
4)....................... 1,635,135,108
Liabilities in excess of
other
assets--(3.7%)........... (58,054,181)
--------------
Net Assets--100%........... $1,577,080,927
--------------
--------------
</TABLE>
- ---------------
I/O--Interest Only.
* REMIC--Real Estate Mortgage Investment Conduit.
# Mortgage dollar roll, see Note 1.
D Partial principal amount pledged as collateral for mortgage dollar roll.
DD Repurchase agreements are collateralized by U.S. Treasury obligations.
-7- See Notes to Financial Statements.
<PAGE>
PRUDENTIAL GOVERNMENT INCOME FUND
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
Assets
February 28, 1995
-----------------
<S>
<C>
Investments, at value (cost
$1,635,931,425)............................................ $ 1,635,135,108
Receivable for investments
sold........................................................ 97,713,112
Interest
receivable....................................................................
13,915,597
Receivable for Fund shares
sold........................................................ 534,129
Deferred expenses and other
assets..................................................... 180,382
-----------------
Total
assets.........................................................................
1,747,478,328
-----------------
Liabilities
Payable for investments
purchased......................................................
114,269,978
Payable for dollar
roll................................................................
45,859,375
Payable for Fund shares
reacquired.....................................................
6,275,706
Accrued expenses and other
liabilities................................................. 2,049,764
Distribution fee
payable...............................................................
654,264
Dividends
payable......................................................................
647,828
Management fee
payable.................................................................
640,486
-----------------
Total
liabilities....................................................................
170,397,401
-----------------
Net
Assets..........................................................................
... $ 1,577,080,927
-----------------
-----------------
Net assets were comprised of:
Common stock, at
par................................................................. $
1,835,209
Paid-in capital in excess of
par..................................................... 1,749,373,598
-----------------
1,751,208,807
Accumulated net realized losses on
investments....................................... (173,331,563)
Net unrealized depreciation on
investments........................................... (796,317)
-----------------
Net assets at February 28,
1995.................................................... $ 1,577,080,927
-----------------
-----------------
Class A:
Net asset value and redemption price per share
($871,145,036 / 101,406,826 shares of common stock issued and
outstanding)......... $8.59
Maximum sales charge (4.0% of offering
price)........................................ .36
-----------------
Maximum offering price to
public..................................................... $8.95
-----------------
-----------------
Class B:
Net asset value, offering price and redemption price per share
($705,731,938 / 82,090,371 shares of common stock issued and
outstanding).......... $8.60
-----------------
-----------------
Class C:
Net asset value, offering price and redemption price per share
($203,953 / 23,721 shares of common stock issued and
outstanding).................. $8.60
-----------------
-----------------
</TABLE>
See Notes to Financial Statements.
-8-
<PAGE>
PRUDENTIAL GOVERNMENT INCOME FUND
Statement of Operations
<TABLE>
<CAPTION>
Year Ended
February 28,
Net Investment Income 1995
--------------
<S> <C>
Income
Interest (net of swap interest
expense of $150,865)............ $ 143,837,354
Income from securities
loaned-net...................... 71,213
--------------
143,908,567
--------------
Expenses
Distribution fee--Class A......... 143,341
Distribution fee--Class B......... 14,862,736
Distribution fee--Class C......... 484
Management fee.................... 9,155,193
Transfer agent's fees and
expenses........................ 2,492,000
Custodian's fees and expenses..... 1,430,000
Reports to shareholders........... 700,000
Franchise taxes................... 545,000
Registration fees................. 80,000
Legal fees........................ 63,000
Insurance expense................. 60,000
Audit fee......................... 58,000
Directors' fees................... 48,000
Miscellaneous..................... 47,263
--------------
Total expenses.................. 29,685,017
--------------
Net investment income............... 114,223,550
--------------
Realized and Unrealized
Gain (Loss) on Investments
Net realized gain (loss):
Investment transactions........... (95,352,332)
Interest rate swap transaction.... 761,247
Written option transactions....... 697,656
--------------
(93,893,429)
--------------
Net change in unrealized
appreciation/depreciation:
Investments....................... (40,180,178)
Interest rate swap................ 709,355
--------------
(39,470,823)
--------------
Net loss on investments............. (133,364,252)
--------------
Net Decrease in Net Assets
Resulting from Operations........... $ (19,140,702)
--------------
--------------
</TABLE>
PRUDENTIAL GOVERNMENT INCOME FUND
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Year Ended February 28,
Increase (Decrease) -------------------------------
in Net Assets 1995 1994
-------------- --------------
<S> <C> <C>
Operations
Net investment
income............. $ 114,223,550 $ 143,951,352
Net realized gain
(loss) on
investment
transactions....... (93,893,429) 73,862,182
Net change in
unrealized
appreciation on
investments........ (39,470,823) (137,565,425)
-------------- --------------
Net increase
(decrease) in net
assets resulting
from operations.... (19,140,702) 80,248,109
-------------- --------------
Dividends and distributions (Note 1)
Dividends to shareholders from
net investment income
Class A............ (7,117,500) (3,625,302)
Class B............ (107,101,716) (140,326,050)
Class C............ (4,334) --
-------------- --------------
(114,223,550) (143,951,352)
-------------- --------------
Distributions to
shareholders in
excess of capital
gains
Class A............ -- (132,529)
Class B............ -- (5,651,138)
-------------- --------------
-- (5,783,667)
-------------- --------------
Fund share transactions
(net of share
conversions) (Note 5)
Net proceeds from
shares
subscribed......... 79,769,541 238,679,715
Net asset value of
shares issued to
shareholders in
reinvestment of
dividends and
distributions...... 64,092,911 83,988,251
Cost of shares
reacquired......... (687,645,132) (740,509,270)
-------------- --------------
Decrease in net
assets from Fund
share
transactions....... (543,782,680) (417,841,304)
-------------- --------------
Total decrease......... (677,146,932) (487,328,214)
Net Assets
Beginning of year...... 2,254,227,859 2,741,556,073
-------------- --------------
End of year............ $1,577,080,927 $2,254,227,859
-------------- --------------
-------------- --------------
</TABLE>
See Notes to Financial Statements. See Notes to Financial Statements.
-9-
<PAGE>
PRUDENTIAL GOVERNMENT INCOME FUND
Notes to Financial Statements
Prudential Government Income Fund, formerly known as Prudential Government
Plus Fund, (the ``Fund'') is registered under the Investment Company Act of 1940
as a diversified, open-end management investment company. Investment operations
commenced on April 22, 1985.
The Fund's investment objective is to seek a high current return. The Fund
will seek to achieve this objective by investing primarily in U.S. Government
and agency securities and writing and purchasing put and call options and net
gains from closing purchase and sale transactions.
Note 1. Accounting The following is a summary
Policies of significant accounting poli-
cies followed by the Fund in the preparation of
its financial statements.
Security Valuation: The Fund values portfolio securities on the basis of current
market quotations provided by dealers or by a pricing service approved by the
Board of Directors, which uses information such as quotations from dealers,
market transactions in comparable securities, various relationships between
securities and calculations on yield to maturity in determining values. Options
and financial futures contracts listed on exchanges are valued at their closing
price on the applicable exchange. When market quotations are not readily
available, a security is valued at fair value as determined in good faith by or
under the direction of the Board of Directors.
Short-term securities which mature in more than 60 days are valued at current
market quotations. Short-term securities which mature in 60 days or less are
valued at amortized cost.
In connection with repurchase agreement transactions, the Fund's custodian,
or designated subcustodians as the case may be under triparty repurchase
agreements, takes possession of the underlying collateral securities, the value
of which exceeds the principal amount of the repurchase transaction, including
accrued interest. To the extent that any repurchase transaction exceeds one
business day, the value of the collateral is marked-to-market on a daily basis
to ensure the adequacy of the collateral. 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.
Interest Rate Swap: An interest rate swap is an agreement between two parties in
which each party commits to make periodic interest payments to the other based
on a notional principal amount for a specified time period, e.g., an exchange of
floating rate payments for fixed rate payments. Interest rate swaps were
conceived as asset/liability management tools. Interest rate swaps only involve
the accrual and exchange of interest payments between the parties and do not
involve the exchange or payment of the contracted notional principal amount. The
Fund is exposed to credit loss in the event of non-performance by the other
party to the interest rate swap. However, the Fund does not anticipate
non-performance by any counterparty.
During the term of a swap, changes in the value of the swap are recognized as
unrealized gains or losses by ``marking-to-market'' to reflect the market value
of the swap. Interest income is accrued or charged based upon the prevailing
terms of the swap. When a swap is terminated, the Fund will record a realized
gain or loss equal to the difference, if any, between the proceeds from (or cost
of) the closing transaction and the Fund's basis in the contract. There were no
interest rate swaps outstanding as of February 28, 1995.
Option Writing: The Fund may either purchase or write options in order to hedge
against adverse market movements or fluctuations in value caused by changes in
prevailing interest rates with respect to securities which the Fund currently
owns or intends to purchase. The Fund's principal reason for writing options is
to realize, through receipt of premiums, a greater current return than would be
realized on the underlying security alone. When the Fund purchases an option, it
pays a premium and an amount equal to that premium is recorded as an investment.
When the Fund writes an option, it receives a premium and an amount equal to
that premium is recorded as a liability. The investment or liability is adjusted
daily to reflect the current market value of the option. If an option expires
unexercised, the Fund realizes a gain or loss to the extent of the premium
received or paid. If an option is exercised, the premium received or paid is an
adjustment to the proceeds from the sale or the cost of the purchase in
determining whether the Fund has realized a gain or loss. The difference between
the premium and the amount received or paid on effecting a closing purchase or
sale transaction is also treated as a realized gain or loss. Gain or loss on
purchased options is included in net realized gain (loss) on investment
transactions. Gain or loss on written options is presented separately as net
realized gain (loss) on written option transactions.
The Fund, as a writer of an option, may have no control over whether the
underlying securities may be sold (called) or
-10-
<PAGE>
purchased (put). As a result, the Fund bears the market risk of an unfavorable
change in the price of the security underlying the written option. The Fund, as
purchaser of an option, bears the risk of the potential inability of the
counterparties to meet the terms of their contracts. As of February 28, 1995,
the Fund did not have any open written options.
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
sales proceeds and the lower repurchase price is recorded as interest income.
The Fund maintains a segregated account, the dollar value of which is at least
equal to its obligations, in respect of dollar rolls.
Securities Lending: The Fund may lend its U.S. Government securities to
broker-dealers or government securities dealers. The loans are secured by
collateral at least equal at all times to the market value of the securities
loaned. The Fund may bear the risk of delay in recovery of, or even loss of
rights in, the securities loaned should the borrower of the securities fail
financially. The Fund receives compensation for lending its securities in the
form of fees or it retains a portion of interest on the investment of any cash
received as collateral. The Fund also continues to receive interest on the
securities loaned and any gain or loss in the market price of the securities
loaned that may occur during the term of the loan will be for the account of the
Fund. There were no loans outstanding as of February 28, 1995.
Securities Transactions and Investment Income: Securities transactions are
recorded on the trade date. Realized gains or losses on sales of securities are
calculated on the identified cost basis. Interest income is recorded on the
accrual basis. 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.
Dividends and Distributions: The Fund declares daily and pays monthly dividends
from net investment income. 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.
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 to its shareholders.
Therefore, no federal income tax provision is required.
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 up to $3 billion
and .35 of 1% of the average daily net assets of the Fund in excess of $3
billion.
The Fund has distribution agreements with Prudential Mutual Fund
Distributors, Inc. (``PMFD''), who acts as the distributor of the Class A shares
of the Fund and Prudential Securities Incorporated (``PSI''), who acts as
distributor of the Class B and Class C shares of the Fund (collectively the
``Distributors''). The Fund compensates the Distributors for distributing and
servicing the Fund's Class A, Class B and Class C shares, pursuant to plans of
distribution (the ``Class A, B and C Plans'') regardless of expenses actually
incurred by them. The distribution fees are accrued daily and payable monthly.
On July 19, 1994, shareholders of the Fund approved amendments to the Class A
and Class B distribution plans under which the distribution plans became
compensation plans, effective August 1, 1994. Prior thereto, the distribution
plans were reimbursement plans, under which PMFD and PSI were reimbursed for
expenses actually incurred by them up to the amount permitted under the Class A
and Class B Plans, respectively. The Fund is not obligated to pay any prior or
future excess distribution costs (costs incurred by the Distributors in excess
of distribution fees paid by the Fund or contingent deferred sales charges
received by the Distributors). The Fund began offering Class C shares on August
1, 1994.
Pursuant to the Class A Plan, the Fund compensates 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
-11-
<PAGE>
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 February
28, 1995.
Pursuant to the Class B Plan, the Fund compensates PSI for its
distribution-related expenses with respect to Class B shares at an annual rate
of up to 1% of the average daily net assets up to $3 billion, .80 of 1% of the
next $1 billion of such net assets and .50 of 1% over $4 billion of the average
daily net assets of the Class B shares. Prior to August 1, 1994, such expenses
under Class B Plan were charged at an effective rate of .90 of 1% of average
daily net assets. Beginning August 1, 1994, the effective rate was reduced to
.825 of 1% of the average daily net assets of Class B shares.
Pursuant to the Class C Plan, the Fund compensates PSI for its
distribution-related expenses with respect to Class C shares at an annual rate
of up to .825 of 1% of the average daily net assets up to $3 billion, .80 of 1%
of the next $1 billion of such net assets and .50 of 1% over $4 billion of the
average daily net assets of the Class C shares. Such expenses under Class C Plan
were charged at an effective rate of .75 of 1% of average daily net assets.
PMFD has advised the Fund that it has received approximately $196,000 in
front-end sales charges resulting from sales of Class A shares during the year
ended February 28, 1995. From these fees, PMFD paid such sales charges to
dealers which in turn paid commissions to salespersons.
PSI has advised the Fund that for the year ended February 28, 1995 it
received approximately $3,123,000 in contingent deferred sales charges imposed
upon redemptions by certain Class B and Class C shareholders.
PMFD is a wholly-owned subsidiary of PMF; PSI, PMF and PIC are indirect,
wholly-owned subsidiaries of The Prudential Insurance Company of America.
Note 3. Other Prudential Mutual Fund Ser-
Transactions vices, Inc. (``PMFS''), a
With Affiliates wholly-owned subsidiary of
PMF, serves as the Fund's transfer agent. During
the year ended February 28, 1995, the Fund incurred fees of approximately
$2,001,000 for the services of PMFS. As of February 28, 1995, approximately
$158,000 of such fees were due to PMFS. Transfer agent fees and expenses in the
Statement of Operations also include certain out of pocket expenses paid to
non-affiliates.
Note 4. Portfolio Purchases and sales of invest-
Securities ment securities, other than
short-term investments, for the year ended
February 28, 1995, were $3,607,229,712 and $4,217,994,778, respectively.
The federal income tax cost basis of the Fund's investments, at February 28,
1995 was the same as for book purposes and, accordingly, net unrealized
depreciation for federal income tax purposes was $796,317 (gross unrealized
appreciation-$16,594,213; gross unrealized depreciation-
$17,390,530).
The Fund had a capital loss carryforward as of February 28, 1995 of
approximately $140,517,000 of which $34,965,000 expires in 1998, $41,965,000
expires in 1999 and $63,587,000 expires in 2003. Accordingly, no capital gains
distribution is expected to be paid to shareholders until net gains have been
realized in excess of such amounts.
Transactions in written options during the year ended February 28, 1995 were
as follows:
<TABLE>
<CAPTION>
Number of
Contracts Premiums
(000) Received
<S> <C> <C>
----------- ------------
Options written 2,601 $ 2,222,656
Options terminated in closing
purchase transactions......... (2,601) (2,222,656)
----------- ------------
Options outstanding at February
28, 1995...................... 0 $ 0
----------- ------------
----------- ------------
</TABLE>
The average monthly balance of dollar rolls outstanding during the year ended
February 28, 1995 was approximately $77,787,000. The amount of dollar rolls
outstanding at February 28, 1995 was $45,859,375, which was 2.62% of total
assets.
Note 5. Capital The Fund offers Class A,
Class B and Class C shares. Class A shares are
sold with a front-end sales charge of up to 4.0%. Class B shares are sold with a
contingent deferred sales charge which declines from 5% to zero depending on the
period of time the shares are held. Class C shares are sold with a contingent
deferred sales charge of 1% during the first year. Commencing in February 1995,
Class B shares automatically convert to Class A shares on a quarterly basis
approximately seven years after purchase.
There are 2 billion shares of common stock, $.01 par value per share, divided
into three classes, designated Class A, B and Class C common stock, each of
which consists of 666,666,666.67 authorized shares.
-12-
<PAGE>
Transactions in shares of common stock were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
<S> <C> <C>
------------ ---------------
Year ended February 28,
1995:
Shares sold................. 1,650,843 $ 14,143,438
Shares issued in
reinvestment of
dividends................. 517,170 4,416,369
Shares reacquired........... (3,871,087) (33,161,047)
------------ ---------------
Net decrease in shares out-
standing before
conversion................ (1,703,074) (14,601,240)
Shares sold upon conversion
from Class B.............. 97,449,952 825,401,064
------------ ---------------
Net increase in shares
outstanding............... 95,746,878 $ 810,799,824
------------ ---------------
------------ ---------------
Year ended February 28,
1994:
Shares sold................. 2,311,175 $ 21,702,798
Shares issued in
reinvestment of dividends
and distributions......... 284,558 2,664,856
Shares reacquired........... (3,453,736) (32,339,525)
------------ ---------------
Net decrease in shares
outstanding............... (858,003) $ (7,971,871)
------------ ---------------
------------ ---------------
<CAPTION>
Class B Shares Amount
<S> <C> <C>
------------ ---------------
Year ended February 28,
1995:
Shares sold................. 7,582,662 $ 65,420,737
Shares issued in
reinvestment of
dividends................. 5,979,498 59,672,362
Shares reacquired........... (75,332,177) (654,474,203)
------------ ---------------
Net decrease in shares out-
standing before
conversion................ (61,770,017) (529,381,104)
Shares reacquired upon con-
version into Class A...... (97,449,952) (825,401,064)
------------ ---------------
Net decrease in shares
outstanding............... (159,219,969) $(1,354,782,168)
------------ ---------------
------------ ---------------
Year ended February 28,
1994:
Shares sold................. 23,072,579 $ 216,976,917
Shares issued in
reinvestment of dividends
and distributions......... 8,684,229 81,323,395
Shares reacquired........... (75,476,876) (708,169,745)
------------ ---------------
Net decrease in shares
outstanding............... (43,720,068) $ (409,869,433)
------------ ---------------
------------ ---------------
<CAPTION>
Class C
<S> <C> <C>
August 1, 1994* through
February 28, 1995:
Shares sold................. 24,418 $ 205,366
Shares issued in
reinvestment of
dividends................. 498 4,180
Shares reacquired........... (1,195) (9,882)
------------ ---------------
Net increase in shares
outstanding............... 23,721 $ 199,664
------------ ---------------
------------ ---------------
</TABLE>
- ---------------
* Commencement of offering of Class C shares.
-13-
<PAGE>
PRUDENTIAL GOVERNMENT INCOME FUND
Financial Highlights
<TABLE>
<CAPTION>
Class A Class B
------------------------------------------------ -------------------------------------------------
Years Ended February 28/29, Years Ended February 28/29,
------------------------------------------------ -------------------------------------------------
1995 1994 1993 1992 1991 1995 1994 1993 1992
-------- ------- ------- ------- ------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value,
beginning of
period............. $ 9.13 $ 9.40 $ 9.17 $ 9.02 $ 9.00 $ 9.13 $ 9.40 $ 9.17 $ 9.02
-------- ------- ------- ------- ------- ---------- ---------- ---------- ----------
Income from investment
operations
Net investment
income............. 0.59 0.61 0.66 0.68 0.69 0.53 0.53 0.58 0.60
Net realized and
unrealized gain
(loss) on
investment
transactions....... (0.54) (0.25) 0.35 0.37 0.26 (0.53) (0.25) 0.35 0.37
-------- ------- ------- ------- ------- ---------- ---------- ---------- ----------
Total from
investment
operations....... 0.05 0.36 1.01 1.05 0.95 -- 0.28 0.93 0.97
-------- ------- ------- ------- ------- ---------- ---------- ---------- ----------
Less distributions
Dividends from net
investment
income............. (0.59) (0.61) (0.66) (0.68) (0.69) (0.53) (0.53) (0.58) (0.60)
Distributions in
excess of
accumulated
gains.............. -- (0.02) -- -- -- -- (0.02) -- --
Distributions from
paid-in capital in
excess of par...... -- -- (0.12) (0.22) (0.24) -- -- (0.12) (0.22)
-------- ------- ------- ------- ------- ---------- ---------- ---------- ----------
Total
distributions.... (0.59) (0.63) (0.78) (0.90) (0.93) (0.53) (0.55) (0.70) (0.82)
-------- ------- ------- ------- ------- ---------- ---------- ---------- ----------
Net asset value, end
of period.......... $ 8.59 $ 9.13 $ 9.40 $ 9.17 $ 9.02 $ 8.60 $ 9.13 $ 9.40 $ 9.17
-------- ------- ------- ------- ------- ---------- ---------- ---------- ----------
-------- ------- ------- ------- ------- ---------- ---------- ---------- ----------
TOTAL RETURN#:....... .83% 3.90% 11.55% 12.18% 11.21% .24% 3.03% 10.61% 11.27%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of
period (000)....... $871,145 $51,673 $61,297 $33,181 $28,971 $ 705,732 $2,202,555 $2,680,259 $2,724,428
Average net assets
(000).............. $ 95,560 $55,921 $46,812 $29,534 $23,428 $1,735,413 $2,487,990 $2,670,924 $2,903,704
Ratios to average net
assets:##
Expenses, including
distribution
fees............. 0.98% 0.84% 0.84% 0.86% 0.85% 1.66% 1.68% 1.69% 1.71%
Expenses, excluding
distribution
fees............. 0.83% 0.69% 0.69% 0.71% 0.70% 0.80% 0.69% 0.69% 0.71%
Net investment
income........... 7.45% 6.48% 7.17% 7.51% 7.76% 6.17% 5.64% 6.32% 6.66%
Portfolio turnover
rate............... 206% 80% 36% 187% 213% 206% 80% 36% 187%
<CAPTION>
Class C
------------
August 1,
1994D
Through
February 28,
1991 1995
---------- ------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value,
beginning of
period............. $ 9.00 $ 8.69
---------- ------
Income from investment
operations
Net investment
income............. 0.62 0.31
Net realized and
unrealized gain
(loss) on
investment
transactions....... 0.26 (0.09)
---------- ------
Total from
investment
operations....... 0.88 0.22
---------- ------
Less distributions
Dividends from net
investment
income............. (0.62) (0.31)
Distributions in
excess of
accumulated
gains.............. -- --
Distributions from
paid-in capital in
excess of par...... (0.24) --
---------- ------
Total
distributions.... (0.86) (0.31)
---------- ------
Net asset value, end
of period.......... $ 9.02 $ 8.60
---------- ------
---------- ------
TOTAL RETURN#:....... 10.35% 2.75%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of
period (000)....... $3,127,587 $ 204
Average net assets
(000).............. $3,432,948 $ 111
Ratios to average net
assets:##
Expenses, including
distribution
fees............. 1.67% 1.63%*
Expenses, excluding
distribution
fees............. 0.70% 0.88%*
Net investment
income........... 6.94% 6.69%*
Portfolio turnover
rate............... 213% 206%
</TABLE>
- ---------------
D Commencement of offering of Class C 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.
## Because of the events referred to in D and the timing of such, the
ratios for the Class C shares are not necessarily comparable to that
of Class A or B shares and are not necessarily indicative of future
ratios.
See Notes to Financial Statements.
-14-
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Shareholders and Board of Directors
Prudential Government Income Fund Inc.
We have audited the accompanying statement of assets and liabilities of
Prudential Government Income Fund Inc. (formerly Prudential Government Plus Fund
Inc.), including the portfolio of investments, as of February 28, 1995, the
related statements of operations for the year then ended and of changes in net
assets for each of the two years in the period then ended and the financial
highlights for each of the five years in the period then ended. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned as of
February 28, 1995 by correspondence with the custodian and brokers; where
replies were not received from brokers, we performed other auditing procedures.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Prudential
Government Income Fund, Inc. as of February 28, 1995, the results of its
operations, the changes in its net assets and the financial highlights for the
respective stated periods in conformity with generally accepted accounting
principles.
Deloitte & Touche LLP
New York, New York
April 13, 1995
IMPORTANCE NOTICE FOR
CERTAIN SHAREHOLDERS
We are required by New York, California, Massachusetts and Oregon to inform
you that dividends which have been derived from interest on federal obligations
are not taxable to shareholders providing the mutual fund meets certain
requirements mandated by the respective state's taxing authorities. We are
pleased to report that 52% of the dividends paid by Prudential Government Income
Fund qualify for such deduction.
For more detailed information regarding your state and local taxes, you
should contact your tax adviser or the state/local taxing authorities.
-15-
<PAGE>
Prudential Government Income Fund
Comparison of Change in Value of $10,000 Investment in
Prudential Government Income Fund and
The Lehman Bros. Government Bond Index
(GRAPH)
(GRAPH)
(GRAPH)
Past performance is no guarantee of future results. Investment return and
principal value will fluctuate so an investor's shares, when redeemed, will
be worth more or less than their original cost.
These graphs are furnished to you in accordance with SEC regulations.
They compare a $10,000 investment in the Prudential Government Income
Fund (Class A, Class B and Class C) with a similar investment in the
Lehman Brothers Government Bond Index (bond index) and the Salomon Bros.
Mortgage Backed Security Index (mortgage index) by portraying the initial
account values at the commencement of operations of each class, and
subsequent account values at the end of each fiscal year (February 28),
as measured on a quarterly basis, beginning in 1990 for Class A shares,
1985 for Class B shares and 1994 for Class C shares. For purposes of the
graphs, and unless otherwise indicated, in the accompanying tables it has
been assumed (a) that the maximum applicable contingent deferred sales
charge was deducted from the initial $10,000 investment in Class A shares;
(b) the maximum applicable contingent deferred sales charge was deducted
from the value of the investment in Class B and Class C shares, assuming
full redemption on March 31, 1995; (c) all recurring fees (including
management fees) were deducted; and (d) all dividends and distributions
were reinvested. Class B shares will automatically convert to Class A
shares, on a quarterly basis, beginning approximately seven years after
purchase. This conversion feature is not reflected in the graph.
The bond index is a weighted index comprised of securities issued or backed
by the U.S. government, its agencies and instrumentalities with a remaining
maturity of one to thirty years. The mortgage index is comprised of mortgage
backed, pass through securities consisting 70% of pass through securities
issued by the Government National Mortgage Association and 23% by the Federal
Home Loan Mortgage Corporation, 5% by the Federal National Mortgage
Association and the balance in a mixture of conventional and Federal
Housing Administration mortgage pools. The bond index and the mortgage
index are unmanaged indices and include the reinvestment of all dividends,
but does not reflect the payment of transaction costs and advisory fees
associated with an investment in the Fund. The securities that comprise
the bond index and the mortgage index may differ substantially from the
securities in the Fund's portfolio. The bond index and the mortgage index
are not the only indices that may be used to characterize performance of
government bond funds and other indices may portray different comparative
performance.
-16-
<PAGE>
Directors
Edward D. Beach
Delayne Dedrick Gold
Harry A. Jacobs, Jr.
Lawrence C. McQuade
Thomas T. Mooney
Thomas H. O'Brien
Thomas A. Owens, Jr.
Richard A. Redeker
Stanley E. Shirk
Officers
Lawrence C. McQuade, President
David W. Drasnin, Vice President
Robert F. Gunia, Vice President
Susan C. Cote, Treasurer
S. Jane Rose, Secretary
Deborah A. Docs, Assistant Secretary
Manager
Prudential Mutual Fund Management, Inc.
One Seaport Plaza
New York, NY 10292
Investment Adviser
Prudential Investment Corporation
Prudential Plaza
Newark, NJ 07101
Distributors
Prudential Mutual Fund Distributors, Inc.
Prudential Securities Incorporated
One Seaport Plaza
New York, NY 10292
Custodian
State Street Bank and Trust Company
One Heritage Drive
North Quincy, MA 02171
Transfer Agent
Prudential Mutual Fund Services, Inc.
P.O. Box 15005
New Brunswick, NJ 08906
Independent Accountants
Deloitte & Touche LLP
Two World Financial Center
New York, NY 10281
Legal Counsel
Shereff, Friedman, Hoffman & Goodman
919 Third Avenue
New York, NY 10022
Prudential Mutual Funds
One Seaport Plaza
New York, NY 10292
Toll Free (800) 225-1852, Collect (908) 417-7555
This report is not authorized for distribution to prospective investors
unless preceded or accompanied by a current prospectus.
744339102
744339201 MF128E
744339300 (LOGO) Cat.#642157Z
<PAGE>
Exhibit 17(H)
Letter to
Shareholders
------------------------
December 6, 1994
Dear Shareholder:
In 1994, interest rates have risen sharply, at a pace unseen in decades.
Since bond prices fall as interest rates rise, it has been an unsettling year
for fixed income investors: the total return of both your Fund and the average
U.S. government fund is in negative territory. Looking ahead, prospects seem
brighter. As of this writing, long-term Treasury rates have reached 8% and
appear to be approaching the top of this interest rate cycle.
<TABLE>
PERFORMANCE*
As of October 31, 1994
<CAPTION>
30-day
NAV SEC Yield
10/31/94 10/31/94
<S> <C> <C>
Class A $9.16 6.7%
Class B $9.16 6.2
Class C $9.16 6.1
</TABLE>
<TABLE>
Average Annual Returns
As of September 30, 1994
<CAPTION>
1 Year 5 Year Since Inception**
<S> <C> <C> <C>
Class A -11.0% N/A 6.0%
Class B -12.9 6.0% 5.9
Class C N/A N/A N/A
</TABLE>
An investment in the Fund is neither insured nor guaranteed by the U.S.
government. Investment return and principal value will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost. Past performance is no guarantee of future results.
N/A -- Average annual returns for Class C shares are not reported as
operations commenced in August, 1994.
*Source: Prudential Mutual Fund Management and Lipper Analytical Services,
Inc. Returns assume payment of applicable sales charges. Class A shares
assume the imposition of a 4% sales charge. For Class B shares, the returns
assume the effects of a declining sales charge of 5%, 4%, 3%, 2%, 1% and 1%,
respectively, over a six-year period. Class B shares will automatically
convert to Class A shares approximately seven years after purchase. Class C
shares are sold subject to a contingent deferred sales charge of 1% during the
first year.
**Inception of Class A is 1/22/90; Class B is 11/07/86; Class C is 8/1/94.
-1-
<PAGE>
Our Objective
The Prudential U.S. Government Fund seeks to provide high total return
through a combination of capital appreciation plus high current income by
investing primarily in U.S. government securities and obligations issued or
guaranteed by U.S. government agencies or instrumentalities. It also may
invest up to 35% in assets in corporate bonds and other debt securities.
As of October 31, 1994, the Fund held 26% in such assets and had an effective
maturity of about 12 years.
The Fed Moves
The Federal Reserve has increased the federal funds rate (the overnight
bank lending rate) six times this year, to 5.50% from 3%. As short-term
interest rates climbed, the bond market drove long-term rates higher as well.
The yield of the benchmark 30-year U.S. Treasury at this writing is over 8% --
an increase of more than two full percentage points over its low of 5.8% last
October -- an historically rapid rise.
The Fed believed that higher short-term interest rates were necessary to
moderate economic growth and keep inflation in check. Third-quarter gross
domestic product (GDP), the value of goods produced and services delivered,
grew at an annualized rate of 3.4%, faster than expected, and still more than
the 2.5% to 3% the Fed would like. Pessimists have argued that inflation must
surely follow, since materials and labor prices can rise rapidly in an
overheating economy. But inflation to date is within the Fed's target when
measured on an actual basis. Inflation as measured by the Consumer Price Index
has been running at 2.8% this year, versus 2.7% in 1993. So it is the fear of
rising inflation that has spooked the markets -- the prospect, but not the
reality -- of any increase.
Interest Rates: How High Is High?
Interest rates have risen at a dizzying rate. For example, if you had
purchased a 30-year U.S. Treasury bond in October, 1993, you would have
received an annual interest rate approaching 6%. Today, you can get a similar
yield on a six-month Treasury bill. As you know, the prices of bonds move
inversely with changes in interest rates: when interest rates rise, bond
prices fall and vice versa. And longer-maturity bonds are more sensitive to
interest rate movements than shorter-term bonds. To date this year,
intermediate-term U.S. government bonds have dropped nearly 2% while long-term
governments have fallen nearly 9% on a total return basis, as measured by
Lehman Brothers.
Long-term yields may continue to climb, but we believe they are now much
closer to the top than to the bottom of this interest rate cycle. Yields have
now risen to attractive levels. The 10-year U.S. Treasury now yields
-2-
<PAGE>
7.79% and the 30-year is at 7.96%. These levels represent historically high
real rates of return over inflation. In November, demand for bonds rose as
institutional investors rushed to lock in attractive yields, providing support
for the market.
The Fund Is Managed For The Long-Term
The Fund is managed with a long-term focus, which means we maintain a
maturity that is longer than many other funds. Over time, this approach
should provide higher total returns than short-term funds but will exhibit
more price volatility. The Fund's effective maturity is nearly 12 years.
We Stayed the Course
The Fund's sector exposure remained steady over the past six months. Our
position in U.S. governments remained unchanged at about 40% of assets, and
mortgage-backed securities held at about 30%. We trimmed corporates slightly,
from 22% of assets to about 19%, and increased cash to 4% from less than one
percent.
When Profits Became Available, We Seized Opportunities
To protect the Fund's net asset value as interest rates rose, we tried to
aggressively take profits whenever they became available. We did this by
selling positions in GNMA (Ginnie Mae) 9% coupon mortgage-backed securities
and CMOs (Collateralized Mortgage Obligations) which did well over the period.
Mortgages generally performed better than U.S. Treasurys during the period
because they provide higher relative coupons and because mortgage prepayment
levels fell as homeowners with higher-coupon mortgages stopped refinancing
(and prepaying) them so quickly. We reinvested the proceeds in intermediate-
term U.S. Treasury notes.
Tailored Corporate Holdings To The Economy
Corporate bonds performed well early in the year but as rates continued to
rise, we felt that corporate credit quality could become vulnerable to slower
economic growth. Therefore, we lightened up slightly on our corporate
holdings, halving our industrial bonds to 4% from 8%. We maintained our
exposure to financial bonds at around 11%, believing that their corporate
profits would likely continue close to their current pace. We held fast to
our position in yankee bonds (those issued in dollars by foreign entities) at
3% of net assets and utilities at 1%.
Our top corporate holdings as of October 31 were: Chase Manhattan Bank,
Comsat Corp., Australia and New Zealand Banking Group Ltd., NationsBank and
Republic N.Y. Corp.
-3-
<PAGE>
The Outlook
Bond returns will continue to be driven by the strength of the economy and
the Federal Reserve's response, at least until mid 1995. We anticipate at
least one more Fed move before they call it quits and consider their anti-
inflationary campaign of 1994 a success. So look for higher short-term rates
and stable long-term rates.
In that kind of market, the best performing bond sectors can change day to
day. We think most investors, however, should be happy with coupon income and
shouldn't expect much in the way of capital appreciation. Diversification may
help keep returns competitive, while limiting risk.
Thank you for the confidence you have shown in us by retaining your
investment in the Prudential U.S. Government Fund.
Sincerely,
Lawrence C. McQuade
President
/s/ Annamarie Carlucci
Annamarie Carlucci
Portfolio Manager
-4-
<PAGE>
PRUDENTIAL U.S. GOVERNMENT FUND Portfolio of Investments
October 31, 1994
<TABLE>
<CAPTION>
Principal
Amount Value
(000) Description (Note 1)
<C> <S> <C>
LONG-TERM INVESTMENTS--94.9%
U. S. Treasury Securities--20.4%
U.S. Treasury Bonds,
$ 2,500 10.75%, 8/15/05................ $ 3,017,175
6,400 12.00%, 8/15/13................ 8,475,008
6,000 11.25%, 2/15/15................ 7,873,140
U.S. Treasury Notes,
2,000 6.75%, 5/31/97................. 1,986,880
2,400 6.875%, 8/31/99................ 2,342,616
3,000 7.75%, 2/15/01................. 3,024,360
------------
Total U. S. Treasury Securities
(cost $29,002,553)............. 26,719,179
------------
U. S. Government Agencies--19.1%
Federal National Mortgage
Assoc.,
40,000 Zero Coupon, 7/05/14........... 7,662,400
Resolution Funding Corp.,
16,400 Zero coupon, 10/15/15.......... 2,894,600
13,500 8.875%, 7/15/20................ 14,436,495
------------
Total U. S. Government Agencies
(cost $25,067,556)............. 24,993,495
------------
Mortgage-Related Securities--29.7%
Federal Home Loan Mortgage
Corp.,
1,500 7.50%, 9/15/05, (CMO).......... 1,455,465
Federal National Mortgage
Assoc.,
2,132 8.50%, 3/25/09, (CMO).......... 2,143,121
3,000 8.95%, 12/25/18, (CMO)......... 3,040,313
5,000 6.50%, 7/25/20, (CMO).......... 4,529,650
2,831 11.00%, 11/01/20............... 3,099,577
17,453 7.00%, 11/01/23 - 5/01/24...... 15,898,854
Government National Mortgage
Assoc.,
3,000 8.50%, 4/15/21 - 8/15/21....... 2,963,419
Nomura Asset Securities Corp.,
$ 3,000 Ser. 94, Class A,
7.53%, 3/15/18............... $ 2,880,937
Shugard Securities Trust, Ser.
A1,
3,000 8.24%, 6/15/01................. 2,927,813
------------
Total Mortgage-Related
Securities
(cost $40,451,943)............. 38,939,149
------------
Corporate Bonds--19.1%
Domestic--16.1%
Coles Myer Finance,
2,000 6.47%, 2/18/04................. 1,744,100
(Financial services)
Comsat Corp.,
3,000 8.125%, 4/01/04................ 2,926,860
(Telecommunications)
Dean Witter Discover & Co.,
1,500 6.00%, 3/01/98................. 1,424,430
(Financial services)
Ford Motor Credit Co.,
2,000 6.25%, 2/26/98................. 1,913,920
(Financial services)
Georgia Power Co.,
2,000 4.75%, 3/01/96................. 1,946,160
(Electric utility)
NationsBank Corp.,
2,500 6.625%, 1/15/98................ 2,419,625
(Financial services)
Republic N.Y. Corp.,
2,000 9.70%, 2/01/09................. 2,177,300
(Financial services)
Star Bank,
1,500 6.375%, 3/01/04................ 1,305,540
(Financial services)
USLIFE Corp.,
2,000 6.375%, 6/15/00................ 1,837,640
(Financial services)
</TABLE>
-5- See Notes to Financial Statements.
<PAGE>
PRUDENTIAL U.S. GOVERNMENT FUND
<TABLE>
<CAPTION>
Principal
Amount Value
(000) Description (Note 1)
<C> <S> <C>
Corporate Bonds (cont'd.)
Zeneca Wilmington, Inc.,
$ 2,000 6.30%, 6/15/03................. $ 1,757,800
(Pharmaceuticals)
Zurich Reinsurance Centre
Holdings, Inc.,
2,000 7.125%, 10/15/23............... 1,588,080
(Financial services)
------------
Total Domestic Corporate Bonds
(cost $23,495,685)............. 21,041,455
------------
Yankee--3.0%
Australia & New Zealand Banking
Group,
3,000* 6.25%, 2/01/04................. 2,563,380
(Financial services)
Svenska Handelsbanken,
1,500* 8.125%, 8/15/07................ 1,422,390
(Financial services)
------------
Total Yankee Corporate Bonds
(cost $4,604,085).............. 3,985,770
------------
Total Corporate Bonds
(cost $28,099,770)............. 25,027,225
------------
Foreign Government Bonds--2.8%
Province of Quebec,
$ 2,000* 9.125%, 3/01/00................ $ 2,079,540
Republic of Italy,
2,000* 6.875%, 9/27/23................ 1,562,560
------------
Total Foreign Government Bonds
(cost $4,185,700).............. 3,642,100
------------
Asset Backed Securities--3.8%
Chase Manhattan Credit Card
Trust,
5,000 7.40%, 5/15/00
(cost $4,993,900).............. 5,001,550
------------
Total Long-Term Investments
(cost $131,801,422)............ 124,322,698
------------
SHORT-TERM INVESTMENT
Time Deposit--1.7%
Mitsubishi Bank, Ltd.,
2,175 4.875%, 11/01/94,
(cost $2,175,000).............. 2,175,000
------------
Total Investments--96.6%
(cost $133,976,422; Note 4).... 126,497,698
Other assets in excess of
liabilities--3.4%.............. 4,418,747
------------
Net Assets--100%............... $130,916,445
------------
------------
</TABLE>
- ---------------
CMO--Collateralized Mortgage Obligations.
* U.S. dollar denominated.
-6- See Notes to Financial Statements.
<PAGE>
PRUDENTIAL U.S. GOVERNMENT FUND
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
Assets October 31, 1994
----------------
<S> <C>
Investments, at value (cost $133,976,422).................................................... $126,497,698
Cash......................................................................................... 68,454
Receivable for investments sold.............................................................. 3,539,834
Interest receivable.......................................................................... 1,593,897
Receivable for Fund shares sold.............................................................. 217,859
Other assets................................................................................. 3,794
----------------
Total assets............................................................................... 131,921,536
----------------
Liabilities
Payable for Fund shares reacquired........................................................... 551,895
Dividends payable............................................................................ 188,990
Accrued expenses............................................................................. 115,755
Distribution fee payable..................................................................... 91,937
Management fee payable....................................................................... 56,514
----------------
Total liabilities.......................................................................... 1,005,091
----------------
Net Assets................................................................................... $130,916,445
----------------
----------------
Net assets were comprised of:
Shares of beneficial interest, at par...................................................... $ 142,882
Paid-in capital in excess of par........................................................... 149,307,128
----------------
149,450,010
Accumulated net realized losses on investments............................................. (11,054,841)
Net unrealized depreciation on investments................................................. (7,478,724)
----------------
Net Assets at October 31, 1994............................................................... $130,916,445
----------------
----------------
Class A:
Net asset value and redemption price per share
($6,776,351 DIVIDED BY 739,850 shares of beneficial interest issued and outstanding)..... $9.16
Maximum sales charge (4.0% of offering price).............................................. .38
Maximum offering price to public........................................................... $9.54
----------------
----------------
Class B:
Net asset value, offering price and redemption price per share
($124,094,356 DIVIDED BY 13,543,333 shares of beneficial interest
issued and outstanding).................................................................. $9.16
----------------
----------------
Class C:
Net asset value, offering price and redemption price per share
($45,738 DIVIDED BY 4,992 shares of beneficial interest issued and outstanding).......... $9.16
----------------
----------------
</TABLE>
See Notes to Financial Statements.
-7-
<PAGE>
PRUDENTIAL U.S. GOVERNMENT FUND
Statement of Operations
<TABLE>
<CAPTION>
Year Ended
October 31,
Net Investment Income 1994
------------
<S> <C>
Income
Interest and discount earned.......... $ 11,339,097
------------
Expenses
Distribution fee--Class A............. 10,639
Distribution fee--Class B............. 1,155,906
Distribution fee--Class C............. 42
Management fee........................ 766,090
Transfer agent's fees and expenses.... 295,000
Shareholder reports................... 138,000
Custodian's fees and expenses......... 100,000
Trustees' fees........................ 54,000
Registration fees..................... 51,000
Audit fee............................. 30,000
Legal fees............................ 25,000
Miscellaneous......................... 8,182
------------
Total expenses...................... 2,633,859
------------
Net investment income................... 8,705,238
------------
Net Realized and Unrealized Loss
on Investments
Net realized loss on investment
transactions.......................... (1,123,882)
Net change in unrealized
appreciation/depreciation on
investments......................... (21,394,608)
------------
Net loss on investments................. (22,518,490)
------------
Net Decrease in Net Assets Resulting
from Operations......................... $(13,813,252)
------------
------------
</TABLE>
See Notes to Financial Statements.
PRUDENTIAL U.S. GOVERNMENT FUND
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Year Ended October 31,
Increase (Decrease) ----------------------------
in Net Assets 1994 1993
------------ ------------
<S> <C> <C>
Operations
Net investment income..... $ 8,705,238 $ 9,312,413
Net realized gain (loss)
on investments.......... (1,123,882) 6,101,139
Net change in unrealized
appreciation/depreciation
on investments.......... (21,394,608) 8,892,501
------------ ------------
Net increase (decrease) in
net assets
resulting from
operations.............. (13,813,252) 24,306,053
------------ ------------
Dividends to shareholders
from net investment income
(Note1)...................
Class A................. (450,567) (402,303)
Class B................. (8,254,322) (8,910,110)
Class C................. (349) --
------------ ------------
(8,705,238) (9,312,413)
------------ ------------
Fund share transactions
(Note 5)
Net proceeds from shares
subscribed.............. 39,812,693 83,709,350
Net asset value of shares
issued in reinvestment
of dividends............ 5,677,995 6,045,712
Cost of shares
reacquired.............. (65,811,259) (91,160,162)
------------ ------------
Net decrease in net assets
from Fund share
transactions............ (20,320,571) (1,405,100)
------------ ------------
Total increase (decrease)... (42,839,061) 13,588,540
Net Assets
Beginning of year........... 173,755,506 160,166,966
------------ ------------
End of year................. $130,916,445 $173,755,506
------------ ------------
------------ ------------
</TABLE>
See Notes to Financial Statements.
-8-
<PAGE>
PRUDENTIAL U.S. GOVERNMENT FUND
Notes to Financial Statements
Prudential U.S. Government Fund (the ``Fund'') was organized as a
Massachusetts business trust on October 2, 1986. Investment operations commenced
on November 7, 1986. The Fund's primary investment objective is to seek a high
total return, capital appreciation plus high current income, primarily through
investment in U.S. Government securities and obligations issued or guaranteed by
U.S. Government agencies or instrumentalities. The ability of issuers of debt
securities, other than those issued or guaranteed by the U.S. Government, may be
affected by economic developments in a specific industry or region.
Note 1. Accounting The following is a summary
Policies of significant accounting poli-
cies followed by the Fund in
the preparation of its financial statements.
Security Valuation: The Board of Trustees has authorized the use of an
independent pricing service to determine valuations for normal institutional
size trading units of securities. The pricing service considers such factors as
security prices, yields, maturities, call features, ratings and developments
relating to specific securities in arriving at securities valuations. Options
and financial futures contracts listed on exchanges are valued at their closing
price on the applicable exchange. When market quotations are not readily
available, a security is valued at fair value as determined in good faith by or
under the direction of the Board of Trustees.
Short-term securities which mature in more than 60 days are valued at current
market quotations. Short-term securities which mature in 60 days or less are
valued at amortized cost which approximates market value.
In connection with transactions in repurchase agreements, it is the Fund's
policy that its custodian or designated subcustodians, as the case may be under
triparty repurchase agreements, take possession of the underlying collateral
securities, the value of which exceeds the principal amount of the repurchase
transaction, including accrued interest. To the extent that any repurchase
transaction exceeds one business day, the value of the collateral is
marked-to-market on a daily basis to ensure the adequacy of the collateral. 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.
Dollar Rolls: The Fund enters into dollar rolls in which the Fund sells
securities for delivery in the current month and simultaneously contracts to
repurchase somewhat similar 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.
Securities Transactions and Investment Income: Securities transactions are
recorded on the trade date. Realized gains or losses on sales of investments are
calculated on the identified cost basis. Interest income is recorded on the
accrual basis.
Net investment income, other than distribution fees, and unrealized and
realized gains or losses are allocated daily to each class of shares based upon
the relative proportion of net assets of each class at the beginning of the day.
Federal Income Taxes: It is the Fund's policy to continue to meet the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute all of its taxable net income to its shareholders.
Therefore, no federal income tax provision is required.
Dividends and Distributions: Dividends from net investment income are accrued
daily and payable monthly. The Fund will distribute annually any net realized
capital gains in excess of capital loss carryforwards, if any. Dividends and
distributions are recorded on the ex-dividend date.
Income distributions and capital gains distributions are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles.
Note 2. Agreements The Fund has a management
agreement with Prudential Mutual Fund Management,
Inc. (``PMF''). Pursuant to this agreement, PMF has responsibility for all
investment advisory services and supervises the subadviser's performance of such
services. PMF has entered into a subadvisory agreement with The Prudential
Investment Corporation (``PIC''); PIC furnishes investment advisory services in
connection with the management of the Fund. PMF pays for the cost of the
subadviser's services, the compensation of officers of the Fund, occupancy and
certain clerical and bookkeeping costs of the Fund. The Fund bears all other
costs and expenses.
The management fee paid 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
-9-
<PAGE>
distributor of the Class A shares of the Fund, and with Prudential Securities
Incorporated (``PSI''), which acts as distributor of the Class B and Class C
shares of the Fund (collectively the ``Distributors''). The Fund compensates the
Distributors for distributing and servicing the Fund's Class A, Class B and C
shares, pursuant to plans of distribution, (the ``Class A, B and C Plans'')
regardless of expenses actually incurred by them. The distribution fees are
accrued daily and payable monthly.
On July 19, 1994, shareholders of the Fund approved amendments to the Class A
and Class B distribution Plans under which the distribution plans became
compensation plans, effective August 1, 1994. Prior thereto, the distribution
plans were reimbursement plans under which PMFD and PSI were reimbursed for
expenses actually incurred by them up to the amount permitted under the Class A
and Class B Plans, respectively. The Fund is not obligated to pay any prior or
future excess distribution costs (costs incurred by the Distributors in excess
of distribution fees paid by the Fund and contingent deferred sales charges
received by the Distributors). The rate of the distribution fees charged to
Class A and Class B shares of the Fund did not change under the amended plans of
distriubution. The Fund began offering Class C shares on August 1, 1994.
Pursuant to the Class A , B and C Plans, the Fund compensates the
Distributors for distribution-related activities at an annual rate of up to .30
of 1%, 1% and 1%, of the average daily net assets of the Class A, B and C
shares, respectively. Such expenses under the Plans were .15 of 1%, .81 of 1%
and .75 of 1% of the average daily net assets of Class A, B and C shares,
respectively, for the fiscal year ended October 31, 1994. Such expenses under
the Class B Plan were assessed at varying rates ranging from zero to 1% of
average net assets during the year ended, October 31, 1994. Currently, the Class
B Plan distribution expenses are .85 of 1% of the average daily net assets.
PMFD has advised the Fund that it has received approximately $72,400 in
front-end sales charges resulting from sales of Class A shares during the fiscal
year ended October 31, 1994. From these fees, PMFD paid such sales charges to
PSI and Pruco Securities Corporation, affiliated broker-dealers, which in turn
paid commissions to sales persons and incurred other distribution costs.
PSI has advised the Fund that for the fiscal year ended October 31, 1994, it
received approximately $446,200 in contingent deferred sales charges imposed
upon certain redemptions by Class B shareholders.
PMFD is a wholly-owned subsidiary of PMF; PSI, PMF and PIC are indirect,
wholly-owned subsidiaries of The Prudential Insurance Company of America.
Note 3. Other Prudential Mutual Fund Ser-
Transactions vices, Inc. (``PMFS''), a
with Affiliates wholly-owned subsidiary of
PMF, serves as the Fund's transfer agent. During
the year ended October 31, 1994, the Fund incurred fees of approximately
$236,000 for the services of PMFS. As of October 31, 1994, approximately $20,000
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 Purchases and sales of invest-
Securities ment securities, other than
short-term investments, for the year ended October
31, 1994 were $58,601,142 and $70,890,556, respectively.
The federal income tax basis of the Fund's investments at October 31, 1994
was substantially the same as the basis for financial statement reporting
purposes and, accordingly, net unrealized depreciation of investments for
federal income tax purposes was $7,478,724 (gross unrealized
appreciation-$631,041; gross unrealized depreciation-$8,109,765).
For federal income tax purposes, the Fund has a capital loss carryforward as
of October 31, 1994 of approximately $11,054,800 of which $1,017,200 expires in
1997, $8,301,600 expires in 1998 and $1,736,000 expires in 2002. Accordingly, no
capital gains distribution is expected to be paid to shareholders until net
gains have been realized in excess of such carryforward.
Note 5. Capital The Fund offers Class A,
Class B and Class C shares.
Class A shares are sold with a front-end sales charge of up to 4.0%. Class B
shares are sold with a contingent deferred sales charge which declines from 5%
to zero depending on the period of time the shares are held. Class C shares are
sold with a contingent deferred sales charge of 1% during the first year. Class
B shares will automatically convert to Class A shares on a quarterly basis
approximately seven years after purchase commencing in or about February 1995.
The Fund has authorized an unlimited number of shares of beneficial interest
of each class at $.01 par value. Transactions in shares of beneficial interest
for the years ended October 31, 1994 and 1993 were as follows:
-10-
<PAGE>
<TABLE>
<CAPTION>
Class A Shares Amount
- -------------------------------- -------------- ------------
<S> <C> <C>
Year ended October 31, 1994:
Shares sold..................... 359,574 $ 3,519,655
Shares issued in reinvestment of
dividends..................... 31,480 306,085
Shares reacquired............... (297,934) (2,879,593)
-------------- ------------
Net increase in shares
outstanding................... 93,120 $ 946,147
-------------- ------------
-------------- ------------
Year ended October 31, 1993:
Shares sold..................... 750,713 $ 7,553,655
Shares issued in reinvestment of
dividends..................... 26,658 272,022
Shares reacquired............... (649,104) (6,560,954)
-------------- ------------
Net increase in shares
outstanding................... 128,267 $ 1,264,723
-------------- ------------
-------------- ------------
<CAPTION>
Class B
- --------------------------------
<S> <C> <C>
Year ended October 31, 1994:
Shares sold..................... 3,633,315 $ 36,246,363
Shares issued in reinvestment of
dividends..................... 550,260 5,371,630
Shares reacquired............... (6,392,542) (62,931,666)
-------------- ------------
Net decrease in shares
outstanding................... (2,208,967) $(21,313,673)
-------------- ------------
-------------- ------------
Year ended October 31, 1993:
Shares sold..................... 7,467,812 $ 76,155,695
Shares issued in reinvestment of
dividends..................... 565,555 5,773,690
Shares reacquired............... (8,280,106) (84,599,208)
-------------- ------------
Net decrease in shares
outstanding................... (246,739) $ (2,669,823)
-------------- ------------
-------------- ------------
<CAPTION>
Class C
- --------------------------------
<S> <C> <C>
August 1, 1994* through
October 31, 1994:
Shares sold..................... 4,962 $ 46,675
Shares issued in reinvestment of
dividends..................... 30 280
-------------- ------------
Net increase in shares
outstanding................... 4,992 $ 46,955
-------------- ------------
-------------- ------------
- ---------------
* Commencement of Class C operations.
</TABLE>
-11-
<PAGE>
PRUDENTIAL U.S. GOVERNMENT FUND
Financial Highlights
<TABLE>
<CAPTION>
Class A Class B Class C
---------------------------------------------------- ------------------------------------------------------ ----------
January 22, August 1,
1990@ 1994+
Year Ended October 31, Through Year Ended October 31, Through
------------------------------------- October 31, ------------------------------------------------------ August 31,
1994 1993 1992 1991 1990 1994 1993 1992 1991 1990 1994
---------- ------ ------ ------ ------------ ---------- -------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER
SHARE
OPERATING
PERFORMANCE:
Net
asset
value,
beginning
of
period... $10.59 $ 9.69 $ 9.49 $ 8.97 $ 9.31 $ 10.60 $ 9.70 $ 9.50 $ 8.97 $ 9.54 $ 9.58
------ ------ ----- ------ ------ ------- ------ ------ ------ ------ ------
Income
from
investment
operations
Net
investment
income... .61 .64 .68 .66 .55 .53 .55 .59 .59 .62 .15
Net
realized
and
unrealized
gain (loss)
on
investment
trans-
actions... (1.43) .90 .20 .52 (.34) (1.44) .90 .20 .53 (.57) (.42)
------- ------ ------ ------ ------ ------- ------ ------ ------ ------ -------
Total
from
investment
opera-
tions... (.82) 1.54 .88 1.18 .21 (.91) 1.45 .79 1.12 .05 (.27)
------ ------ ------ ------ ------ ------- ------ ------ ------ ------ -------
Less
distributions
Dividends
from net
investment
income... (.61) (.64) (.68) (.66) (.55) (.53) (.55) (.59) (.59) (.62) (.15)
------ ------ ------ ------ ------ ------- ------- ------ ------ ------ -------
Net
asset
value,
end of
period.. $9.16 $10.59 $ 9.69 $9.49 $8.97 $9.16 $10.60 $ 9.70 $9.50 $ 8.97 $ 9.16
------- ------ ------ ------ ------ ------- ------- ------ ------- ------- -------
------- ------ ------ ------ ------ ------- ------- ------ ------- ------- -------
TOTAL
RETURN#... (7.80)% 16.43% 9.39% 13.72% 2.16% (8.57)% 15.44% 8.46% 12.86% .64% (3.03)%
RATIOS/
SUPPLEMENTAL
DATA:
Net assets,
end of
period
(000).. $6,776 $6,849 $5,024 $2,574 $1,617 $ 124,094 $166,907 $155,143 $158,790 $172,521 $ 46
Average
net
assets
(000)... $7,093 $6,339 $3,769 $2,158 $ 918 $ 146,123 $162,107 $154,502 $168,421 $174,276 $ 23
Ratios to
average
net assets:
+ +
Expenses,
including
distribution
fees... 1.09% .96% .94% 1.24% 1.08%* 1.75% 1.81% 1.79% 2.09% 1.99% 1.82%*
Expenses,
excluding
distribution
fees... .94% .81% .79% 1.09% .94%* .94% .81% .79% 1.09% .99% 1.07%*
Net
investment
income.. 6.35% 6.35% 6.92% 7.24% 7.16%* 5.65% 5.50% 6.07% 6.39% 6.89% 6.25%*
Portfolio
turnover.. 39% 66% 66% 236% 608% 39% 66% 66% 236% 608% 39%
- ---------------
* Annualized.
@ Commencement of offering of Class A shares.
# 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.
+ Commencement of offering of Class C shares.
+ + Because of the event referred to in + and the timing of such, the
ratios for the Class A and Class B shares are not necessarily comparable
to that of Class C shares and are not indicative of future ratios.
</TABLE>
See Notes to Financial Statements.
-12-
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Shareholders and Trustees
Prudential U.S. Government Fund
We have audited the accompanying statement of assets and liabilities of
Prudential U.S. Government Fund, including the portfolio of investments, as of
October 31, 1994, the related statements of operations for the year then ended
and of changes in net assets for each of the two years in the period then ended,
and the financial highlights for each of the five years in the period then
ended. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned as of
October 31, 1994 by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Prudential U.S.
Government Fund as of October 31, 1994, the results of its operations, the
changes in its net assets, and the financial highlights for the respective
stated periods in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
New York, New York
December 16, 1994
IMPORTANT NOTICE FOR SHAREHOLDERS
We are required by Massachusetts, Missouri, and Oregon to inform you that
dividends which have been derived from interest on federal obligations are not
taxable to shareholders providing the mutual fund meets certain requirements
mandated by the respective state taxing authorities. We are pleased to report
that 33% of the dividends paid by the Fund qualify for such tax deduction.
-13-
<PAGE>
Past performance is not predictive of future performance and an investor's
shares may be worth more or less than their original cost.
These graphs are furnished to you in accordance with SEC regulations. They
compare a $10,000 investment in Prudential U.S. Government Fund (Class A, Class
B, and Class C) with a similar investment in the Lehman Brothers Government Bond
Index (LGBI) by portraying the initial account values at the commencement of
operations of each class and subsequent account values at the end of each fiscal
year (October 31), as measured on a quarterly basis, beginning in 1990 for Class
A shares, in 1986 for Class B shares and 1994 for Class C shares. For purposes
of the graphs and, unless otherwise indicated, the accompanying tables, it has
been assumed that (a) the maximum sales charge was deducted from the initial
$10,000 investment in Class A shares; (b) the maximum applicable contingent
deferred sales charge was deducted from the value of the investment in Class B
shares and Class C shares, assuming full redemption on October 31, 1994; (c) all
recurring fees (including management fees) were deducted; and (d) all dividends
and distributions were reinvested. Class B shares will automatically convert to
Class A shares on a quarterly basis approximately five years after purchase.
This conversion feature is expected to be implemented on or about February 1995
and is not reflected in the graph.
The LGBI is a weighted index comprised of securities issued or backed by the
U.S. government, its agencies and instrumentalities with a remaining maturity of
one to thirty years. The LGBI is an unmanaged index and includes the
reinvestment of all dividends, but does not reflect the payment of transaction
costs and advisory fees associated with an investment in the Fund. The
securities which comprise the LGBI may differ substantially from the securities
in the Fund's portfolio. The LGBI is not the only index that may be used to
characterize performance of income funds and other indices may portray different
comparative performance.
-14-
<PAGE>
THE PRUDENTIAL MUTUAL FUND FAMILY
- --------------------------------------------------------------------------------
Prudential Mutual Fund Management provides 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.
(formerly known as Prudential
Government Plus Fund)
Prudential Government Securities Trust
Intermediate Term Series
Prudential High Yield Fund, Inc.
Prudential Structured Maturity Fund, Inc.
Income Portfolio
Prudential U.S. Government Fund
The BlackRock Government Income Trust
TAX-EXEMPT BOND FUNDS
Prudential California Municipal Fund
California Series
California Income Series
Prudential Municipal Bond Fund
High Yield Series
Insured Series
Modified Term Series
Prudential Municipal Series Fund
Arizona Series
Florida Series
Georgia Series
Hawaii Income Series
Maryland Series
Massachusetts Series
Michigan Series
Minnesota Series
New Jersey Series
New York Series
North Carolina Series
Ohio Series
Pennsylvania Series
Prudential National Municipals Fund, Inc.
GLOBAL FUNDS
Prudential Europe Growth Fund, Inc.
Prudential Global Fund, Inc.
Prudential Global Genesis Fund, Inc.
Prudential Global Natural Resources Fund, Inc.
Prudential Intermediate Global Income Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Prudential Short-Term Global Income Fund, Inc.
Global Assets Portfolio
Short-Term Global Income Portfolio
Global Utility Fund, Inc.
EQUITY FUNDS
Prudential Equity Fund, Inc.
Prudential Equity Income Fund
Prudential Allocation Fund
(formerly known as Prudential FlexiFund)
Conservatively Managed Portfolio
Strategy Portfolio
Prudential Strategist Fund, Inc.
(formerly known as Prudential Growth Fund)
Prudential Growth Opportunity Fund, Inc.
Prudential IncomeVertible-Registered Trademark- Fund, Inc.
Prudential Multi-Sector Fund, Inc.
Prudential Utility Fund, Inc.
Nicholas-Applegate Fund, Inc.
Nicholas-Applegate Growth Equity Fund
MONEY MARKET FUNDS
- -Taxable Money Market Funds
Prudential Government Securities Trust
Money Market Series
U.S. Treasury Money Market Series
Prudential Special Money Market Fund
Money Market Series
Prudential MoneyMart Assets
- -Tax-Free Money Market Funds
Prudential Tax-Free Money Fund
Prudential California Municipal Fund
California Money Market Series
Prudential Municipal Series Fund
Connecticut Money Market Series
Massachusets Money Market Series
New Jersey Money Market Series
New York Money Market Series
- -Command Funds
Command Money Fund
Command Government Fund
Command Tax-Free Fund
- -Institutional Money Market Funds
Prudential Institutional Liquidity Portfolio, Inc.
Institutional Money Market Series
<PAGE>
ANNUAL REPORT
October 31, 1994
Prudential
U.S. Government
Fund
- ---------------
(ICON)
(LOGO)
Trustees
Stephen C. Eyre
Delayne Dedrick Gold
Don G. Hoff
Harry A. Jacobs, Jr.
Sidney R. Knafel
Robert E. La Blanc
Lawrence C. McQuade
Thomas A. Owens, Jr.
Richard A. Redeker
Clay T. Whitehead
Officers
Lawrence C. McQuade, President
Robert F. Gunia, Vice President
Susan C. Cote, Treasurer
S. Jane Rose, Secretary
Domenick Pugliese, Assistant Secretary
Manager
Prudential Mutual Fund Management, Inc.
One Seaport Plaza
New York, NY 10292
Investment Adviser
The Prudential Investment Corporation
Prudential Plaza
Newark, NJ 07101
Distributors
Prudential Mutual Fund Distributors, Inc.
Prudential Securities Incorporated
One Seaport Plaza
New York, NY 10292
Custodian
State Street Bank and Trust Company
One Heritage Drive
North Quincy, MA 02171
Transfer Agent
Prudential Mutual Fund Services, Inc.
P.O. Box 15005
New Brunswick, NJ 08906
Independent Accountants
Deloitte & Touche LLP
Two World Financial Center
New York, NY 10281
Legal Counsel
Shereff, Friedman, Hoffman & Goodman
919 Third Avenue
New York, NY 10022
Prudential Mutual Funds
One Seaport Plaza
New York, NY 10292
Toll Free (800) 225-1852, Collect (908) 417-7555
This report is not authorized for distribution to prospective investors
unless preceded or accompanied by a current prospectus.
743914202 MF130E-2
743914103 Cat.#4401169
(LOGO)
