<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 4, 2000
REGISTRATION NOS. 2-82976
811-3712
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
PRE-EFFECTIVE AMENDMENT NO. / /
POST-EFFECTIVE AMENDMENT NO. 28 /X/
AND/OR
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 31 /X/
(Check appropriate box or boxes)
------------------------
PRUDENTIAL GOVERNMENT INCOME FUND, INC.
(Exact name of registrant as specified in charter)
GATEWAY CENTER THREE,
100 MULBERRY STREET
NEWARK, NEW JERSEY 07102-4077
(Address of Principal Executive Offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (973) 367-7521
DEBORAH A. DOCS, ESQ.
GATEWAY CENTER THREE,
100 MULBERRY STREET
NEWARK, NEW JERSEY 07102-4077
(NAME AND ADDRESS OF AGENT FOR SERVICE)
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE
DATE OF THE REGISTRATION STATEMENT.
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE
(CHECK APPROPRIATE BOX):
<TABLE>
<C> <S>
/X/ immediately upon filing pursuant to paragraph (b)
/ / on (date) pursuant to paragraph (b)
/ / 60 days after filing pursuant to paragraph (a)(1)
/ / on (date) pursuant to paragraph (a)(1)
/ / 75 days after filing pursuant to paragraph (a)(2)
/ / on pursuant to paragraph (a)(2) of Rule 485.
If appropriate, check the following box:
/ / This post-effective amendment designates a new
effective date for a previously filed
post-effective amendment.
</TABLE>
Title of Securities Being
Registered............... Shares of Common Stock, par value $.01 per share.
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<PAGE>
PROSPECTUS May 4, 2000
PRUDENTIAL
GOVERNMENT INCOME FUND, INC.
FUND TYPE Government securities
INVESTMENT OBJECTIVE High current return
[GRAPHIC -- BUILD ON THE ROCK]
As with all mutual funds, the Securities and Exchange Commission has not
approved or disapproved the Fund's shares nor has the SEC determined that this
prospectus is complete or accurate. It is a criminal offense to state otherwise.
[PRUDENTIAL LOGO]
<PAGE>
TABLE OF CONTENTS
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<TABLE>
<S> <C>
1 RISK/RETURN SUMMARY
1 Investment Objective and Principal Strategies
1 Principal Risks
2 Evaluating Performance
3 Fees and Expenses
5 HOW THE FUND INVESTS
5 Investment Objective and Policies
7 Other Investments and Strategies
11 Investment Risks
16 HOW THE FUND IS MANAGED
16 Board of Directors
16 Manager
16 Investment Adviser
18 Distributor
19 FUND DISTRIBUTIONS AND TAX ISSUES
19 Distributions
20 Tax Issues
21 If You Sell or Exchange Your Shares
23 HOW TO BUY, SELL AND EXCHANGE SHARES OF THE FUND
23 How to Buy Shares
31 How to Sell Your Shares
35 How to Exchange Your Shares
36 Telephone Redemptions or Exchanges
38 FINANCIAL HIGHLIGHTS
38 Class A Shares
39 Class B Shares
40 Class C Shares
41 Class Z Shares
44 THE PRUDENTIAL MUTUAL FUND FAMILY
FOR MORE INFORMATION (Back Cover)
</TABLE>
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PRUDENTIAL GOVERNMENT INCOME FUND, INC. [LOGO] (800) 225-1852
<PAGE>
RISK/RETURN SUMMARY
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This section highlights key information about the PRUDENTIAL GOVERNMENT INCOME
FUND, INC. which we refer to as "the Fund." Additional information follows this
summary.
INVESTMENT OBJECTIVE AND PRINCIPAL STRATEGIES
Our investment objective is HIGH CURRENT RETURN. We normally invest at least 65%
of the Fund's total assets in U.S. Government securities, including U.S.
Treasury bills, notes, bonds, strips and other debt securities issued by the
U.S. Treasury, and obligations, including mortgage-related securities, issued or
guaranteed by U.S. Government agencies or instrumentalities. We may also engage
in active trading. While we make every effort to achieve our objective, we can't
guarantee success.
The investment adviser has a team of fixed-income professionals, including
credit analysts and traders, with experience in many sectors of the U.S. and
foreign fixed-income securities markets. In deciding which portfolio securities
to buy and sell, the investment adviser will consider economic conditions and
interest rate fundamentals. The investment adviser will also evaluate individual
issues within each bond sector based upon their relative investment merit and
will consider factors such as yield and potential for price appreciation, as
well as credit quality, maturity and risk.
PRINCIPAL RISKS
Although we try to invest wisely, all investments involve risk. The debt
obligations in which the Fund invests are subject to the risk of losing value
because interest rates change or there is a lack of confidence in the borrower.
In addition, these securities may be subject to the risk that the issuer may be
unable to make principal and interest payments when they are due.
Mortgage-related securities are also subject to prepayment risk, which means
that if they are prepaid, the Fund may have to replace them with lower-yielding
securities.
The Fund may actively and frequently trade its portfolio securities. High
portfolio turnover results in higher transaction costs and can affect the Fund's
performance and have adverse tax consequences.
Like any mutual fund, an investment in the Fund could lose value, and you
could lose money. For more detailed information about the risks associated with
the Fund, see "How the Fund Invests--Investment Risks."
An investment in the Fund is not a bank deposit and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency.
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1
<PAGE>
RISK/RETURN SUMMARY
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EVALUATING PERFORMANCE
A number of factors--including risk--can affect how the Fund performs. The
following bar chart shows the Fund's performance for each full calendar year of
operation for the last 10 years. The bar chart and table below demonstrate the
risk of investing in the Fund by showing how returns can change from year to
year and by showing how the Fund's average annual total returns compare with
those of a broad measure of market performance and a group of similar mutual
funds. Past performance does not mean that the Fund will achieve similar results
in the future.
ANNUAL RETURNS* (CLASS B SHARES)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
1990 7.07%
1991 14.32%
1992 5.83%
1993 6.90%
1994 -4.76%
1995 19.01%
1996 0.81%
1997 8.56%
1998 8.02%
1999 -3.60%
</TABLE>
BEST QUARTER: 6.49% (2nd quarter of 1995)
WORST QUARTER: -3.45% (1st quarter of 1994)
* THESE ANNUAL RETURNS DO NOT INCLUDE SALES CHARGES. IF THE SALES CHARGES WERE
INCLUDED, THE ANNUAL RETURNS WOULD BE LOWER THAN THOSE SHOWN. WITHOUT THE
DISTRIBUTION AND SERVICE (12b-1) FEE WAIVER, THE ANNUAL RETURNS WOULD HAVE
BEEN LOWER, TOO.
AVERAGE ANNUAL RETURNS(1) (AS OF 12-31-99)
<TABLE>
<CAPTION>
1 YR 5 YRS 10 YRS SINCE INCEPTION
<S> <C> <C> <C> <C>
Class A shares (7.03)% 6.09% N/A 6.47% (since 1-22-90)
Class B shares (8.60)% 6.13% 5.99% 6.95% (since 4-22-85)
Class C shares (5.49)% 6.16% N/A 5.34% (since 8-1-94)
Class Z shares (2.93)% N/A N/A 4.65% (since 3-4-96)
Lehman Bros. Government Bond
Index(2) (2.23)% 7.44% 7.48% N/A
Lipper Average(3) (3.02)% 6.50% 6.63% N/A
</TABLE>
1 THE FUND'S RETURNS ARE AFTER DEDUCTION OF SALES CHARGES AND EXPENSES.
WITHOUT THE DISTRIBUTION AND SERVICE (12b-1) FEE WAIVER FOR CLASS A,
CLASS B, AND CLASS C SHARES, THE RETURNS WOULD HAVE BEEN LOWER.
2 THE LEHMAN BROTHERS GOVERNMENT BOND INDEX (GOV'T BOND INDEX) -- AN
UNMANAGED INDEX OF SECURITIES ISSUED OR BACKED BY THE U.S. GOVERNMENT, ITS
AGENCIES AND INSTRUMENTALITIES WITH BETWEEN ONE AND THIRTY YEARS REMAINING
TO MATURITY -- GIVES A BROAD LOOK AT HOW U.S. GOVERNMENT BONDS WITH SUCH
MATURITIES HAVE PERFORMED. THESE RETURNS DO NOT INCLUDE THE EFFECT OF ANY
SALES CHARGES OR OPERATING EXPENSES OF A MUTUAL FUND. THESE RETURNS WOULD
BE LOWER IF THEY INCLUDED THE EFFECT OF SALES CHARGES AND OPERATING
EXPENSES. GOV'T BOND INDEX RETURNS SINCE THE INCEPTION OF EACH CLASS ARE
108.70% FOR CLASS A, 242.76% FOR CLASS B, 41.64% FOR CLASS C AND 22.72% FOR
CLASS Z SHARES. SOURCE: LEHMAN BROTHERS.
3 THE LIPPER AVERAGE IS BASED ON THE AVERAGE RETURN OF ALL MUTUAL FUNDS IN
THE LIPPER GENERAL U.S. GOVERNMENT BOND FUND CATEGORY. THESE RETURNS DO NOT
INCLUDE THE EFFECT OF ANY SALES CHARGES. THESE RETURNS WOULD BE LOWER IF
THEY INCLUDED THE EFFECT OF SALES CHARGES. LIPPER RETURNS SINCE THE
INCEPTION OF EACH CLASS ARE 93.23% FOR CLASS A, 190.44% FOR CLASS B, 35.24%
FOR CLASS C AND 18.42% FOR CLASS Z SHARES. SOURCE: LIPPER INC.
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2 PRUDENTIAL GOVERNMENT INCOME FUND, INC. [LOGO] (800) 225-1852
<PAGE>
RISK/RETURN SUMMARY
- ------------------------------------------------
FEES AND EXPENSES
These tables show the sales charges, fees and expenses that you may pay if you
buy and hold shares of each class of the Fund--Class A, B, C and Z. Each share
class has different sales charges-- known as loads--and expenses, but represents
an investment in the same fund. Class Z shares are available only to a limited
group of investors. For more information about which share class may be right
for you, see "How to Buy, Sell and Exchange Shares of the Fund."
SHAREHOLDER FEES(1) (PAID DIRECTLY FROM YOUR INVESTMENT)
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Z
<S> <C> <C> <C> <C>
Maximum sales charge (load)
imposed on purchases (as a
percentage of offering
price) 4% None 1% None
Maximum deferred sales
charge (load) (as a
percentage of the lower of
original purchase price or
sale proceeds) None 5%(2) 1%(3) None
Maximum sales charge (load)
imposed on reinvested
dividends and other
distributions None None None None
Redemption fees None None None None
Exchange fee None None None None
</TABLE>
ANNUAL FUND OPERATING EXPENSES (DEDUCTED FROM FUND ASSETS)
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Z
<S> <C> <C> <C> <C>
Management fees .50% .50% .50% .50%
+ Distribution and service
(12b-1) fees(4) .30% 1.00% 1.00% None
+ Other expenses .19% .19% .19% .19%
= Total annual Fund
operating expenses .99% 1.69% 1.69% .69%
- Fee waiver or expense
reimbursement(4) .05% .175% .25% None
= NET ANNUAL FUND OPERATING
EXPENSES .94% 1.52% 1.44% .69%
</TABLE>
1 YOUR BROKER MAY CHARGE YOU A SEPARATE OR ADDITIONAL FEE FOR PURCHASES AND
SALES OF SHARES.
2 THE CONTINGENT DEFERRED SALES CHARGE (CDSC) FOR CLASS B SHARES DECREASES BY
1% ANNUALLY TO 1% IN THE FIFTH AND SIXTH YEARS AND 0% IN THE SEVENTH YEAR.
CLASS B SHARES CONVERT TO CLASS A SHARES APPROXIMATELY SEVEN YEARS AFTER
PURCHASE.
3 THE CDSC FOR CLASS C SHARES IS 1% FOR SHARES REDEEMED WITHIN 18 MONTHS OF
PURCHASE.
4 FOR THE FISCAL YEAR ENDING FEBRUARY 28, 2001, THE DISTRIBUTOR OF THE FUND
HAS CONTRACTUALLY AGREED TO REDUCE ITS DISTRIBUTION AND SERVICE (12b-1)
FEES FOR CLASS A, CLASS B AND CLASS C SHARES TO .25 OF 1%, .825 OF 1% AND
.75 OF 1% OF THE AVERAGE DAILY NET ASSETS OF CLASS A, CLASS B AND CLASS C
SHARES, RESPECTIVELY.
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3
<PAGE>
RISK/RETURN SUMMARY
- ------------------------------------------------
EXAMPLE
This example will help you compare the fees and expenses of the Fund's different
share classes and compare the cost of investing in the Fund with the cost of
investing in other mutual funds.
The example assumes that you invest $10,000 in the Fund for the time periods
indicated and then sell all of your shares at the end of those periods. The
example also assumes that your investment has a 5% return each year and that the
Fund's operating expenses remain the same, except for the Distributor's
reduction of distribution and service (12b-1) fees for Class A, Class B and
Class C shares during the first year. Although your actual costs may be higher
or lower, based on these assumptions, your costs would be:
<TABLE>
<CAPTION>
1 YR 3 YRS 5 YRS 10 YRS
<S> <C> <C> <C> <C>
Class A shares $492 $698 $921 $1,560
Class B shares $654 $816 $1,001 $1,710
Class C shares $345 $603 $985 $2,057
Class Z shares $70 $221 $384 $859
</TABLE>
You would pay the following expenses on the same investment if you did not sell
your shares:
<TABLE>
<CAPTION>
1 YR 3 YRS 5 YRS 10 YRS
<S> <C> <C> <C> <C>
Class A shares $492 $698 $921 $1,560
Class B shares $154 $516 $901 $1,710
Class C shares $245 $603 $985 $2,057
Class Z shares $70 $221 $384 $859
</TABLE>
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4 PRUDENTIAL GOVERNMENT INCOME FUND, INC. [LOGO] (800) 225-1852
<PAGE>
HOW THE FUND INVESTS
- -------------------------------------
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is HIGH CURRENT RETURN. While we make every
effort to achieve our objective, we can't guarantee success.
The Fund seeks to achieve its objective by investing under normal market
conditions at least 65% of its total assets in U.S. GOVERNMENT SECURITIES. These
include DEBT OBLIGATIONS ISSUED BY THE U.S. TREASURY. Treasury securities are
all backed by the full faith and credit of the U.S. Government, which means that
payment of interest and principal is guaranteed, but yield and market value are
not.
The Fund may also acquire U.S. Government securities in the form of
custodial receipts that show ownership of future interest payments, principal
payments or both on certain U.S. Treasury notes or bonds. Such notes or bonds
are held in custody by a bank on behalf of the owners. These custodial receipts
are commonly referred to as TREASURY STRIPS.
The Fund may also invest in other DEBT OBLIGATIONS ISSUED OR GUARANTEED BY
THE U.S. GOVERNMENT and government-related entities. Some of these debt
securities are backed by the full faith and credit of the U.S. Government. These
include obligations of the Government National Mortgage Association (GNMA or
"Ginnie Mae"), the Farmers Home Administration and the Export-Import Bank. Debt
securities issued by other government entities, like obligations of the Federal
National Mortgage Association (FNMA or "Fannie Mae"), the Federal Home Loan
Mortgage Corporation (FHLMC or "Freddie Mac"), the Federal Home Loan Bank, the
Tennessee Valley Authority and the United States Postal Service are not backed
by the full faith and credit of the U.S. Government. However, these issuers have
the right to borrow from the U.S. Treasury to meet their obligations. In
contrast, the debt securities of other issuers, like the Farm Credit System,
depend entirely upon their own resources to repay their debt obligations.
The Fund has no limitations with respect to the maturities of portfolio
securities in which it may invest.
The Fund invests in MORTGAGE-RELATED SECURITIES issued or guaranteed by U.S.
governmental entities. The Fund may also invest in privately issued
MORTGAGE-RELATED SECURITIES. These securities are usually pass-through
instruments that pay investors a share of all interest and principal payments
from an underlying pool of fixed or adjustable rate mortgages. Mortgage-related
securities issued by the U.S. Government or its agencies
- --------------------------------------------------------------------------------
5
<PAGE>
HOW THE FUND INVESTS
- ------------------------------------------------
include FNMAs, GNMAs and FHLMCs. The U.S. Government or the issuing agency
directly or indirectly guarantees the payment of interest and principal on these
securities. Privately issued mortgage-related securities are not guaranteed by
U.S. governmental entities and generally have one or more types of credit
enhancement to ensure timely receipt of payments and to protect against default.
Mortgage pass-through securities include collateralized mortgage
obligations, real estate mortgage investment conduits, multi-class pass-through
securities, stripped mortgage-backed securities and balloon payment
mortgage-backed securities. A COLLATERALIZED MORTGAGE OBLIGATION (CMO) is a
security backed by an underlying portfolio of mortgages or mortgage-backed
securities that may be issued or guaranteed by a bank or by U.S. governmental
entities. A REAL ESTATE MORTGAGE INVESTMENT CONDUIT (REMIC) is a security issued
by a U.S. Government agency or private issuer and secured by real property.
REMICs consist of classes of regular interest, some of which may be adjustable
rate, and a single class of residual interests. The Fund does not intend to
invest in residual interests. A MULTI-CLASS PASS-THROUGH SECURITY is an equity
interest in a trust composed of underlying mortgage assets. Payments of
principal of and interest on the mortgage assets and any reinvestment income
thereon provide funds to pay debt service on the CMO or to make scheduled
distributions on the multi-class pass-through security. A STRIPPED
MORTGAGE-BACKED SECURITY (MBS STRIP) may be issued by U.S. governmental entities
or by private institutions. MBS strips take the pieces of a debt security
(principal and interest) and break them apart. The resulting securities may be
sold separately and may perform differently. The Fund may also invest in BALLOON
PAYMENT MORTGAGE-BACKED SECURITIES, which are amortizing mortgage securities
offering payments of principal and interest, the last payment of which is
predominantly principal.
The values of mortgage-related securities vary with changes in market
interest rates generally and changes in yields among various kinds of
mortgage-related securities. Such values are particularly sensitive to changes
in prepayments of the underlying mortgages. For example, during periods of
falling interest rates, prepayments tend to accelerate as homeowners and others
refinance their higher rate mortgages; these prepayments reduce the anticipated
duration of the mortgage-related securities. Conversely, during periods of
rising interest rates, prepayments
- -------------------------------------------------------------------
6 PRUDENTIAL GOVERNMENT INCOME FUND, INC. [LOGO] (800) 225-1852
<PAGE>
HOW THE FUND INVESTS
- ------------------------------------------------
can be expected to decelerate, which has the effect of extending the anticipated
duration at the same time that the value of the securities declines. MBS strips
tend to be even more highly sensitive to changes in prepayment and interest
rates than mortgage-related securities and CMOs generally.
The Fund may also engage in ACTIVE TRADING--that is, frequent trading of its
securities--in order to take advantage of new investment opportunities or yield
differentials. There may be tax consequences, such as a possible increase in
short-term capital gains or losses, when the Fund sells a security without
regard to how long it has held the security. In addition, active trading may
result in greater transaction costs, which will reduce the Fund's return.
For more information, see "Investment Risks" below and the Statement of
Additional Information, "Description of the Fund, Its Investments and Risks."
The Statement of Additional Information--which we refer to as the SAI--contains
additional information about the Fund. To obtain a copy, see the back cover page
of this prospectus.
The Fund's investment objective is a fundamental policy that cannot be
changed without shareholder approval. The Board of the Fund can change
investment policies of the Fund that are not fundamental.
OTHER INVESTMENTS AND STRATEGIES
In addition to the principal strategies, we also may use the following
investment strategies to increase the Fund's returns or protect its assets if
market conditions warrant.
ASSET-BACKED SECURITIES
The Fund may invest up to 20% of the Fund's total assets in PRIVATELY-ISSUED
ASSET-BACKED SECURITIES. An asset-backed security is another type of
pass-through instrument that pays interest based upon the cash flow of an
underlying pool of assets, such as automobile loans and credit card receivables.
FOREIGN BANK OBLIGATIONS
The Fund may invest in OBLIGATIONS OF FOREIGN BANKS AND FOREIGN BRANCHES OF U.S.
BANKS only if, after making that investment, all such investments would make up
less than 10% of the Fund's total assets (determined at the time of investment).
- --------------------------------------------------------------------------------
7
<PAGE>
HOW THE FUND INVESTS
- ------------------------------------------------
The Fund may invest in 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.
FIXED AND ADJUSTABLE RATE DEBT SECURITIES
The Fund is permitted to invest in both fixed and adjustable rate debt
securities. FIXED RATE DEBT SECURITIES are securities that have an interest rate
that is set at the time the security is issued. ADJUSTABLE RATE DEBT SECURITES
are securities that have an interest rate that is adjusted based on the market
rate at a specified period. The value of adjustable rate debt securities will,
like other debt securities, generally vary inversely with changes in prevailing
interest rates. The value of adjustable rate debt 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 debt obligations in which the Fund may invest are rated at least A by
Standard & Poor's Ratings Group ("S&P") or Moody's Investors Service, Inc.
("Moody's") or, if unrated, are deemed to be of comparable credit quality by the
Fund's investment adviser.
REPURCHASE AND REVERSE REPURCHASE AGREEMENTS
The Fund may use REPURCHASE AGREEMENTS, where a party agrees to sell a security
to the Fund and then repurchases it at an agreed-upon price at a stated time. A
repurchase agreement is like a loan by the Fund to the other party which creates
a fixed return for the Fund. Repurchase agreements are used for cash management
purposes.
The Fund may use REVERSE REPURCHASE AGREEMENTS, where the Fund borrows money
on a temporary basis by selling a security with an obligation to repurchase it
at an agreed-upon price and time.
MONEY MARKET INSTRUMENTS
The Fund may, under normal circumstances, invest up to 20% of its total assets
in high-quality MONEY MARKET INSTRUMENTS, including commercial paper of domestic
companies, certificates of deposit, bankers' acceptances and other obligations
of domestic and foreign banks. Investments in money market instruments for
coverage purposes will be excluded in calculating
- -------------------------------------------------------------------
8 PRUDENTIAL GOVERNMENT INCOME FUND, INC. [LOGO] (800) 225-1852
<PAGE>
HOW THE FUND INVESTS
- ------------------------------------------------
the 20%. The Fund will only purchase money market instruments that are in one of
the two highest quality grades of a major rating service or that we determine
are of comparable equality.
TEMPORARY DEFENSIVE INVESTMENTS
In response to adverse market, economic or political conditions, we may
temporarily invest up to 100% of the Fund's total assets in high-quality money
market instruments, cash, repurchase agreements or U.S. Government securities.
Investing heavily in these securities limits our ability to achieve our
investment objective, but can help to preserve the Fund's assets.
DERIVATIVE STRATEGIES
We may use various DERIVATIVE STRATEGIES to try to improve the Fund's returns.
We may use hedging techniques to try to protect the Fund's assets. We cannot
guarantee that these strategies and techniques will work, that the instruments
necessary to implement these strategies and techniques will be available, or
that the Fund will not lose money. Derivatives--such as futures contracts,
including interest rate futures contracts and Eurodollar instruments, options,
including straddles, options on futures, and interest rate swaps--involve costs
and can be volatile. With derivatives, the investment adviser tries to predict
if the underlying investment, whether a security, market index, currency,
interest rate, or some other investment, will go up or down at some future date.
We may use derivatives to try to reduce risk or to increase return consistent
with the Fund's overall investment objective. The investment adviser will
consider other factors (such as cost) in deciding whether to employ any
particular strategy or use any particular instrument. Any derivatives we may use
may not match the Fund's underlying holdings.
OPTIONS
The Fund may buy and sell call or put options on U.S. Government securities
traded on U.S. securities exchanges or in the over-the-counter market. An OPTION
is the right to buy or sell a security in exchange for a premium. The Fund will
sell only covered options.
The Fund may use straddles. A STRADDLE is a combination of a call and a put
written on the same security at the same exercise price. The Fund's use of
straddles will not exceed 5% of its net assets.
- --------------------------------------------------------------------------------
9
<PAGE>
HOW THE FUND INVESTS
- ------------------------------------------------
FUTURES CONTRACTS AND RELATED OPTIONS
The Fund may purchase and sell financial futures contracts and related options
on financial futures. A FUTURES CONTRACT is an agreement to buy or sell a set
quantity of an underlying product at a future date, or to make or receive a cash
payment based on the value of a securities index. The Fund may invest up to 5%
of its total assets for initial margin deposits on existing futures and options
on futures and for premiums paid for these types of options.
The Fund may invest in Eurodollar instruments. EURODOLLAR INSTRUMENTS are
essentially U.S. dollar-denominated futures contracts linked to the London
Interbank Offered Rate (LIBOR). Eurodollar instruments enable purchasers to
obtain a fixed rate for the lending of funds and sellers to obtain a fixed rate
for borrowings.
INTEREST RATE SWAP TRANSACTIONS
The Fund may enter into INTEREST RATE SWAP TRANSACTIONS. In a swap transaction,
the Fund and another party "trade" income streams. The swap is done to preserve
a return or spread on a particular investment or portion of a portfolio or to
protect against any increase in the price of securities the Fund anticipates
purchasing at a later date.
DOLLAR ROLLS
The Fund may enter into DOLLAR ROLLS in which the Fund sells securities to be
delivered in the current month and repurchases substantially similar (same type
and coupon) securities to be delivered on a specified future date by the same
party. The Fund is paid the difference between the current sales price and the
forward price for the future purchase as well as the interest earned on the cash
proceeds of the initial sale.
WHEN-ISSUED AND DELAYED-DELIVERY SECURITIES
The Fund may purchase money market obligations on a WHEN-ISSUED or
DELAYED-DELIVERY basis. When the Fund makes this type of purchase, the price and
interest rate are fixed at the time of purchase, but delivery and payment for
the obligations take place at a later time. The Fund does not earn interest
income until the date the obligations are delivered.
ZERO COUPON BONDS
The Fund may invest up to 5% of its total assets in zero coupon U.S. Government
securities. ZERO COUPON BONDS do not pay interest during the
- -------------------------------------------------------------------
10 PRUDENTIAL GOVERNMENT INCOME FUND, INC. [LOGO] (800) 225-1852
<PAGE>
HOW THE FUND INVESTS
- ------------------------------------------------
life of the security. An investor makes money by purchasing the security at a
price that is less than the money the investor will receive when the borrower
repays the amount borrowed (face value).
The Fund records the amount zero coupon bonds rise in price each year
(phantom income) for accounting and federal income tax purposes, but does not
receive income currently. Because the Fund is required under federal tax laws to
distribute income to its shareholders, in certain circumstances, the Fund may
have to dispose of its portfolio securities under disadvantageous conditions or
borrow to generate enough cash to distribute phantom income.
SHORT SALES AGAINST-THE-BOX
The Fund may use SHORT SALES AGAINST-THE-BOX. In a short sale "against the box,"
the Fund owns or has the right to acquire the security at no additional cost
through conversion or exchange of other securities it owns. The Fund may engage
in such short sales only to the extent that not more than 10% of the Fund's net
assets (as determined at the time of the short sale) are held as collateral for
such sales.
For more information about these strategies, see the SAI, "Description of
the Fund, Its Investments and Risks."
ADDITIONAL STRATEGIES
The Fund also follows certain policies when it LENDS ITS SECURITIES to others
(the Fund may lend up to 30% of the value of its total assets); BORROWS MONEY
(the Fund can borrow up to 20% of the value of its total assets); and HOLDS
ILLIQUID SECURITIES (the Fund may hold up to 15% of its net assets in illiquid
securities, including securities with legal or contractual restrictions on
resale, those without a readily available market and repurchase agreements with
maturities longer than seven days). The Fund is subject to certain investment
restrictions that are fundamental policies, which means they cannot be changed
without shareholder approval. For more information about these restrictions, see
the SAI.
INVESTMENT RISKS
As noted, all investments involve risk, and investing in the Fund is no
exception. Since the Fund's holdings can vary significantly from broad market
indexes, performance of the Fund can deviate from performance of the indexes.
This chart outlines the key risks and potential rewards of the Fund's principal
investments and certain other non-principal investments the Fund may make. See,
too, "Description of the Fund, Its Investments and Risks" in the SAI.
- --------------------------------------------------------------------------------
11
<PAGE>
HOW THE FUND INVESTS
- ------------------------------------------------
INVESTMENT TYPE
<TABLE>
<CAPTION>
% OF FUND'S TOTAL ASSETS RISKS POTENTIAL REWARDS
<S> <C> <C>
- ---------------------------------------------------------------------------------
U.S. GOVERNMENT -- Credit risk--the risk -- Regular interest
SECURITIES that the borrower income
can't pay back the -- Generally more secure
UP TO 100%; AT LEAST money borrowed or than lower quality
65% make interest debt securities and
payments (relatively equity securities
low for U.S. -- The U.S. Government
Government guarantees interest
securities) and principal
-- Market risk--the risk payments on certain
that obligations U.S. Government
will lose value in securities
the market because -- May preserve the
interest rates rise Fund's assets
or there is a lack
of confidence in the
borrower
-- Not all U.S.
Government
securities are
insured or
guaranteed by the
U.S.
Government--some are
backed by the
issuing agency
- ---------------------------------------------------------------------------------
MORTGAGE-RELATED -- Prepayment risk--the -- Regular interest
SECURITIES risk that the income
underlying mortgages -- The U.S. Government
PERCENTAGE VARIES; UP may be pre-paid, guarantees interest
TO 100% IN U.S. partially or and principal
GOVERNMENT BACKED completely, payments on certain
generally during securities
periods of falling -- May benefit from
interest rates, security interest in
which could real estate
adversely affect collateral
yield to maturity -- Pass-through
and could require instruments provide
the Fund to reinvest greater
in lower-yielding diversification than
securities direct ownership of
-- Credit risk--the risk loans
that the underlying
mortgages will not
be paid by debtors
or by credit
insurers or
guarantors of such
instruments. Some
private mortgage
securities are
unsecured or secured
by lower-rated
insurers or
guarantors and thus
may involve greater
risk
-- See market risk
- ---------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------
12 PRUDENTIAL GOVERNMENT INCOME FUND, INC. [LOGO] (800) 225-1852
<PAGE>
HOW THE FUND INVESTS
- ------------------------------------------------
INVESTMENT TYPE (CONT'D)
<TABLE>
<CAPTION>
% OF FUND'S TOTAL ASSETS RISKS POTENTIAL REWARDS
<S> <C> <C>
- ---------------------------------------------------------------------------------
ASSET-BACKED SECURITIES -- The security interest -- Regular interest
in the underlying income
UP TO 20% collateral may not -- Prepayment risk is
be as great as with generally lower than
mortgage-related with
securities mortgage-related
-- Credit risk--the risk securities
that the underlying -- Pass-through
receivables will not instruments provide
be paid by debtors greater
or by credit diversification than
insurers or direct ownership of
guarantors of such loans
instruments. Some
asset-backed
securities are
unsecured or secured
by lower-rated
insurers or
guarantors and thus
may involve greater
risk
-- See market risk and
prepayment risk
- ---------------------------------------------------------------------------------
DERIVATIVES -- Derivatives such as -- The Fund could make
futures, options, money and protect
PERCENTAGE VARIES options on futures against losses if
and interest rate the investment
swaps that are used analysis proves
for hedging purposes correct
may not fully offset -- One way to manage the
the underlying Fund's risk/return
positions and this balance is to lock
could result in in the value of an
losses to the Fund investment ahead of
that would not have time
otherwise occurred -- Derivatives used for
-- Derivatives used for return enhancement
risk management may purposes involve a
not have the type of leverage and
intended effects and could generate
may result in losses substantial gains at
or missed low cost
opportunities
-- The other party to a
derivatives contract
could default
-- Certain types of
derivatives
involve costs to the
Fund that can reduce
returns
-- Derivatives used for
return enhancement
purposes involve a
type of leverage
(borrowing for
investment) and
could magnify losses
- ---------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
13
<PAGE>
HOW THE FUND INVESTS
- ------------------------------------------------
INVESTMENT TYPE (CONT'D)
<TABLE>
<CAPTION>
% OF FUND'S TOTAL ASSETS RISKS POTENTIAL REWARDS
<S> <C> <C>
- ---------------------------------------------------------------------------------
MONEY MARKET -- Limits potential for -- May preserve the
INSTRUMENTS capital appreciation Fund's assets
-- See credit risk and
UP TO 20%; UP TO 100% market risk (which
ON A TEMPORARY BASIS are less of a
concern for money
market instruments)
- ---------------------------------------------------------------------------------
ILLIQUID SECURITIES -- Illiquidity risk--the -- May offer a more
risk that bonds may attractive yield or
UP TO 15% OF NET ASSETS be difficult to potential for growth
value precisely and than more widely
sell at time or traded securities
price desired, in
which case valuation
would depend more on
investment adviser's
judgment than is
generally the case
with higher-rated
securities
- ---------------------------------------------------------------------------------
FOREIGN BANK -- Foreign markets, -- Investors can
OBLIGATIONS economies and participate in the
political systems growth of foreign
LESS THAN 10% may not be as stable markets and
as those in the companies operating
U.S., particularly in those markets
those in developing -- Changing value of
countries foreign currencies
-- May be less liquid can cause gains
than U.S. debt -- Opportunities for
securities diversification
-- Differences in
foreign laws,
accounting
standards, public
information, custody
and settlement
practices provide
less reliable
information on
foreign investments
and involve more
risks
-- Currency risk--
changing value of
foreign currencies
can cause losses
- ---------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------
14 PRUDENTIAL GOVERNMENT INCOME FUND, INC. [LOGO] (800) 225-1852
<PAGE>
HOW THE FUND INVESTS
- ------------------------------------------------
INVESTMENT TYPE (CONT'D)
<TABLE>
<CAPTION>
% OF FUND'S TOTAL ASSETS RISKS POTENTIAL REWARDS
<S> <C> <C>
- ---------------------------------------------------------------------------------
WHEN-ISSUED AND -- May magnify -- May magnify
DELAYED-DELIVERY underlying underlying
SECURITIES, REPURCHASE investment losses investment gains
AGREEMENTS, REVERSE -- Investment costs may
REPURCHASE AGREEMENTS, exceed potential
DOLLAR ROLLS AND SHORT underlying
SALES investment gains
PERCENTAGE VARIES
- ---------------------------------------------------------------------------------
ZERO COUPON BONDS -- Typically subject to -- Value rises faster
greater volatility when interest rates
PERCENTAGE VARIES; and less liquidity fall
USUALLY LESS THAN 5% in adverse markets
than other debt
securities
-- See credit risk and
market risk
- ---------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
15
<PAGE>
HOW THE FUND IS MANAGED
- -------------------------------------
BOARD OF DIRECTORS
The Fund's Board of Directors oversees the actions of the Manager, investment
adviser and Distributor and decides on general policies. The Board also oversees
the Fund's officers, who conduct and supervise the daily business operations of
the Fund.
MANAGER
PRUDENTIAL INVESTMENTS FUND MANAGEMENT LLC (PIFM)
GATEWAY CENTER THREE, 100 MULBERRY STREET
NEWARK, NJ 07102-4077
Under a management agreement with the Fund, PIFM manages the Fund's
investment operations and administers its business affairs. PIFM also is
responsible for supervising the Fund's investment adviser. For the fiscal year
ended February 29, 2000, the Fund paid PIFM management fees of .50% of the
Fund's average daily net assets.
PIFM and its predecessors have served as manager or administrator to
investment companies since 1987. As of January 31, 2000, PIFM served as the
manager to all 43 of the Prudential mutual funds, and as manager or
administrator to 22 closed-end investment companies, with aggregate assets of
approximately $74.9 billion.
INVESTMENT ADVISER
The Prudential Investment Corporation, called Prudential Investments, is the
Fund's investment adviser and has served as an investment adviser to investment
companies since 1984. Its address is Prudential Plaza, 751 Broad Street, Newark,
NJ 07102. PIFM has responsibility for all investment advisory services,
supervises Prudential Investments and pays Prudential Investments for its
services.
Prudential Investments' Fixed Income Group manages more than $135 billion
for Prudential's retail investors, institutional investors, and policyholders.
Senior Managing Directors James J. Sullivan and Jack W. Gaston head the Group,
which is organized into teams specializing in different market sectors.
Top-down, broad investment decisions are made by the Fixed Income Policy
Committee, whereas bottom-up security selection is made by the sector teams.
- -------------------------------------------------------------------
16 PRUDENTIAL GOVERNMENT INCOME FUND, INC. [LOGO] (800) 225-1852
<PAGE>
HOW THE FUND IS MANAGED
- ------------------------------------------------
Mr. Sullivan has overall responsibility for overseeing portfolio management
and credit research. Prior to joining Prudential Investments in 1998, he was a
managing director in Prudential's Capital Management Group, where he oversaw
portfolio management and credit research for Prudential's General Account and
subsidiary fixed-income portfolios. He has more than 16 years of experience in
risk management, arbitrage trading, and corporate bond investing.
Mr. Gaston has overall responsibility for overseeing quantitative research
and risk management. Prior to this appointment in 1999, he was senior managing
director of the Capital Management Group where he was responsible for the
investment performance and risk management for Prudential's General Account and
subsidiary fixed-income portfolios. He has more than 20 years of experience in
investment management, including extensive experience applying quantitative
techniques to portfolio management.
The Fixed Income Investment Policy Committee is comprised of key senior
investment managers. Members include seven sector team leaders, the chief
investment strategist, and the head of risk management. The Committee uses a
top-down approach to investment strategy, asset allocation, and general risk
management, identifying sectors in which to invest.
The U.S. Liquidity Team, headed by Michael Lillard, is primarily responsible
for overseeing the day-to-day management of the Fund. This Team uses a bottom-up
approach, which focuses on individual securities, while staying within the
guidelines of the Investment Policy Committee and the Fund's investment
restrictions and policies. In addition, the Credit Research team of analysts
supports the sector teams using bottom-up fundamentals, as well as economic and
industry trends. Other sector teams may contribute to securities selection when
appropriate.
U.S. LIQUIDITY
ASSETS UNDER MANAGEMENT: $22.6 billion (as of December 31, 1999).
TEAM LEADER: Michael Lillard. GENERAL INVESTMENT EXPERIENCE: 12 years.
PORTFOLIO MANAGERS: 9. AVERAGE GENERAL INVESTMENT EXPERIENCE: 10 years, which
includes team members with significant mutual fund experience.
SECTOR: U.S. Treasuries, agencies and mortgages.
- --------------------------------------------------------------------------------
17
<PAGE>
HOW THE FUND IS MANAGED
- ------------------------------------------------
INVESTMENT STRATEGY: Focus is on high quality, liquidity and controlled risk.
DISTRIBUTOR
Prudential Investment Management Services LLC (PIMS) distributes the Fund's
shares under a Distribution Agreement with the Fund. The Fund has Distribution
and Service Plans under Rule 12b-1 under the Investment Company Act. Under the
Plans and the Distribution Agreement, PIMS pays the expenses of distributing the
Fund's Class A, B, C and Z shares and provides certain shareholder support
services. The Fund pays distribution and other fees to PIMS as compensation for
its services for each class of shares other than Class Z. These fees--known as
12b-1 fees--are shown in the "Fees and Expenses" tables.
- -------------------------------------------------------------------
18 PRUDENTIAL GOVERNMENT INCOME FUND, INC. [LOGO] (800) 225-1852
<PAGE>
FUND DISTRIBUTIONS AND TAX ISSUES
- -------------------------------------
Investors who buy shares of the Fund should be aware of some important tax
issues. For example, the Fund distributes DIVIDENDS of ordinary income and
CAPITAL GAINS, if any, to shareholders. These distributions are subject to
federal income taxes, unless you hold your shares in a 401(k) plan, an
Individual Retirement Account (IRA) or some other qualified or tax-deferred plan
or account. Dividends and distributions from the Fund also may be subject to
state and local income tax in the state where you live.
Also, if you sell shares of the Fund for a profit, you may have to pay
capital gains taxes on the amount of your profit, again unless you hold your
shares in a qualified or tax-deferred plan or account.
The following briefly discusses some of the important tax issues you should
be aware of, but is not meant to be tax advice. For tax advice, please speak
with your tax adviser.
DISTRIBUTIONS
The Fund distributes DIVIDENDS out of any net investment income, plus short-term
capital gains, to shareholders typically every quarter. For example, if the Fund
owns a U.S. Government bond and the bond pays interest, the Fund will pay out a
portion of this interest as a dividend to its shareholders, assuming the Fund's
income is more than its costs and expenses. The dividends you receive from the
Fund will be taxed as ordinary income whether or not they are reinvested in the
Fund.
The Fund also distributes LONG-TERM CAPITAL GAINS to shareholders--
typically once a year. Long-term capital gains are generated when the Fund sells
assets that it held for more than 12 months for a profit. For an individual, the
maximum long-term capital gains rate is 20%.
For your convenience, Fund distributions of dividends and capital gains are
AUTOMATICALLY REINVESTED in the Fund without any sales charge. If you ask us to
pay the distributions in cash, we will send you a check if your account is with
the Transfer Agent. Otherwise, if your account is with a broker, you will
receive a credit to your account. Either way, the distributions may be subject
to taxes, unless your shares are held in a qualified or tax-deferred plan or
account. For more information about automatic reinvestment and other shareholder
services, see "Step 4: Additional Shareholder Services" in the next section.
- --------------------------------------------------------------------------------
19
<PAGE>
FUND DISTRIBUTIONS AND TAX ISSUES
- ------------------------------------------------
TAX ISSUES
FORM 1099
Every year, you will receive a Form 1099, which reports the amount of dividends
and long-term capital gains we distributed to you during the prior year. If you
own shares of the Fund as part of a qualified or tax-deferred plan or account,
your taxes are deferred, so you will not receive a Form 1099. However, you will
receive a Form 1099 when you take any distributions from your qualified or
tax-deferred plan or account.
Fund distributions are generally taxable to you in the calendar year they
are received, except when we declare certain dividends in the fourth quarter,
and actually pay them in January of the following year. In such cases, the
dividends are treated as if they were paid on December 31 of the prior year.
WITHHOLDING TAXES
If federal law requires you to provide the Fund with your taxpayer
identification number and certifications as to your tax status, and you fail to
do this, or if you are otherwise subject to backup withholding, we will withhold
and pay to the U.S. Treasury 31% of your taxable distributions and gross sale
proceeds. Dividends of net investment income and short-term capital gains paid
to a nonresident foreign shareholder generally will be subject to a U.S.
withholding tax of 30%. This rate may be lower, depending on any tax treaty the
U.S. may have with the shareholder's country.
IF YOU PURCHASE JUST BEFORE RECORD DATE
If you buy shares of the Fund just before the record date for a distribution
(the date that determines who receives the distribution), that distribution will
be paid to you. As explained above, the distribution may be subject to income or
capital gains taxes. You may think you've done well, since you bought shares one
day and soon thereafter received a distribution. That is not so because when
dividends are paid out, the value of each share of the Fund decreases by the
amount of the dividend to reflect the payout although this may not be apparent
because the value of each share of the Fund also will be affected by market
changes, if any. The distribution you receive makes up for the decrease in share
value. However, the timing of your purchase does mean that part of your
investment came back to you as taxable income.
- -------------------------------------------------------------------
20 PRUDENTIAL GOVERNMENT INCOME FUND, INC. [LOGO] (800) 225-1852
<PAGE>
FUND DISTRIBUTIONS AND TAX ISSUES
- ------------------------------------------------
QUALIFIED OR TAX-DEFERRED RETIREMENT PLANS
Retirement plans and accounts allow you to defer paying taxes on investment
income and capital gains. Contributions to these plans may also be tax
deductible, although distributions from these plans generally are taxable. In
the case of Roth IRA accounts, contributions are not tax deductible, but
distributions from the plan may be tax free. Please contact your financial
adviser for information on a variety of Prudential mutual funds that are
suitable for retirement plans offered by Prudential.
IF YOU SELL OR EXCHANGE YOUR SHARES
If you sell any shares of the Fund for a profit, you have REALIZED A CAPITAL
GAIN, which is subject to tax unless the shares are held in a qualified or
tax-deferred plan or account. For individuals, the maximum capital gains tax
rate is 20% for shares held for more than twelve months. If you sell shares of
the Fund for a loss, you may have a capital loss, which you may use to offset
certain capital gains you have.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
<S> <C> <C>
+$ CAPITAL GAIN
(taxes owed)
Receipts from Sale $ OR
-$ CAPITAL LOSS
(offset against gain)
- ---------------------------------------------------------------------
</TABLE>
If you sell shares and realize a loss, you will not be permitted to use the
loss to the extent you replace the shares (including pursuant to the
reinvestment of a dividend) within a 61-day period (beginning 30 days before the
sale of the shares). Under certain circumstances, if you acquire shares of the
Fund and sell or exchange your shares within 90 days, you may not be allowed to
include certain charges incurred in acquiring the shares for purposes of
calculating gain or loss realized upon the sale of the shares.
Exchanging your shares of the Fund for the shares of another Prudential
mutual fund is considered a sale for tax purposes. In other words, it's a
"taxable event." Therefore, if the shares you exchanged have increased in value
since you purchased them, you have capital gains, which are subject to the taxes
described above.
Any gain or loss you may have from selling or exchanging Fund shares will
not be reported on Form 1099; however, proceeds from the sale or exchange will
be reported on Form 1099-B. Therefore, unless you hold your
- --------------------------------------------------------------------------------
21
<PAGE>
FUND DISTRIBUTIONS AND TAX ISSUES
- ------------------------------------------------
shares in a qualified or tax-deferred plan or account, you or your financial
adviser should keep track of the dates on which you buy and sell--or
exchange--Fund shares, as well as the amount of any gain or loss on each
transaction. For tax advice, please see your tax adviser.
AUTOMATIC CONVERSION OF CLASS B SHARES
We have obtained a legal opinion that the conversion of Class B shares into
Class A shares--which happens automatically approximately seven years after
purchase--is not a "taxable event". This opinion, however, is not binding on the
Internal Revenue Service. For more information about the automatic conversion of
Class B shares, see "Class B Shares Convert to Class A Shares After
Approximately Seven Years" in the next section.
- -------------------------------------------------------------------
22 PRUDENTIAL GOVERNMENT INCOME FUND, INC. [LOGO] (800) 225-1852
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
- -------------------------------------
HOW TO BUY SHARES
STEP 1: OPEN AN ACCOUNT
If you don't have an account with us or a securities firm that is permitted to
buy or sell shares of the Fund for you, call Prudential Mutual Fund Services LLC
(PMFS) at (800) 225-1852 or contact:
PRUDENTIAL MUTUAL FUND SERVICES LLC
ATTN: INVESTMENT SERVICES
P.O. BOX 15020
NEW BRUNSWICK, NJ 08906-5020
To purchase by wire, call the number above to obtain an application. After
PMFS receives your completed application, you will receive an account number.
For additional information about purchasing shares of the Fund, see the back
cover page of this prospectus. We have the right to reject any purchase order
(including an exchange into the Fund) or suspend or modify the Fund's sale of
its shares.
STEP 2: CHOOSE A SHARE CLASS
Individual investors can choose among Class A, Class B, Class C and Class Z
shares of the Fund, although Class Z shares are available only to a limited
group of investors.
Multiple share classes let you choose a cost structure that meets your
needs. With Class A shares, you pay the sales charge at the time of purchase,
but the operating expenses each year are lower than the expenses of Class B and
Class C shares. With Class B shares, you only pay a sales charge if you sell
your shares within six years (that is why it is called a Contingent Deferred
Sales Charge or CDSC), but the operating expenses each year are higher than
Class A share expenses. With Class C shares, you pay a 1% front-end sales charge
and a 1% CDSC if you sell within 18 months of purchase, but the operating
expenses are also higher than the expenses for Class A shares.
When choosing a share class, you should consider the following:
-- The amount of your investment
-- The length of time you expect to hold the shares and the impact of
the varying distribution fees
-- The different sales charges that apply to each share class--
Class A's front-end sales charge vs. Class B's CDSC vs. Class C's
lower front-end sales charge and low CDSC
-- Whether you qualify for any reduction or waiver of sales charges
- --------------------------------------------------------------------------------
23
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
- ------------------------------------------------
-- The fact that Class B shares automatically convert to Class A shares
approximately seven years after purchase
-- Whether you qualify to purchase Class Z shares.
See "How to Sell Your Shares" for a description of the impact of CDSCs.
SHARE CLASS COMPARISON. Use this chart to help you compare the Fund's different
share classes. The discussion following this chart will tell you whether you are
entitled to a reduction or waiver of any sales charges.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Z
<S> <C> <C> <C> <C>
Minimum purchase amount(1) $1,000 $1,000 $2,500 None
Minimum amount for $100 $100 $100 None
subsequent purchases(1)
Maximum initial sales 4% of the None 1% of the None
charge public public
offering offering
price price
Contingent Deferred Sales None If sold during: 1% on sales None
Charge (CDSC)(2) Year 1 5% made within
Year 2 4% 18 months of
Year 3 3% purchase(2)
Year 4 2%
Year 5 1%
Year 6 1%
Year 7 0%
Annual distribution and .30 of 1% 1% up to 1% None
service (12b-1) fees (shown (.25 of 1% $3 billion, (.75 of 1%
as a percentage currently) .80 of 1% next currently)
of average net assets)(3) $1 billion, and
.50 of 1% over
$4 billion
(.825 of 1%
currently)
</TABLE>
1 THE MINIMUM INVESTMENT REQUIREMENTS DO NOT APPLY TO CERTAIN RETIREMENT AND
EMPLOYEE SAVINGS PLANS AND CUSTODIAL ACCOUNTS FOR MINORS. THE MINIMUM
INITIAL AND SUBSEQUENT INVESTMENT FOR PURCHASES MADE THROUGH THE AUTOMATIC
INVESTMENT PLAN IS $50. FOR MORE INFORMATION, SEE "STEP 4: ADDITIONAL
SHAREHOLDER SERVICES--AUTOMATIC INVESTMENT PLAN."
2 FOR MORE INFORMATION ABOUT THE CDSC AND HOW IT IS CALCULATED, SEE "HOW TO
SELL YOUR SHARES--CONTINGENT DEFERRED SALES CHARGE (CDSC)." CLASS C SHARES
BOUGHT BEFORE NOVEMBER 2, 1998 HAVE A 1% CDSC IF SOLD WITHIN ONE YEAR.
3 THESE DISTRIBUTION AND SERVICE (12b-1) FEES ARE PAID FROM THE FUND'S ASSETS
ON A CONTINUOUS BASIS. OVER TIME, THE FEES WILL INCREASE THE COST OF YOUR
INVESTMENT AND MAY COST YOU MORE THAN PAYING OTHER TYPES OF SALES CHARGES.
CLASS A SHARES MAY PAY A SERVICE FEE OF UP TO .25 OF 1%. CLASS B AND
CLASS C SHARES WILL PAY A SERVICE FEE OF .25 OF 1%. THE DISTRIBUTION FEE
FOR CLASS A SHARES IS LIMITED TO .30 OF 1% (INCLUDING UP TO .25 OF 1% AS A
SERVICE FEE), IS .75 OF 1% UP TO $3 BILLION, .55 OF 1% OF THE NEXT
$1 BILLION, AND .25 OF 1% OVER $4 BILLION FOR CLASS B SHARES AND IS .75 OF
1% FOR CLASS C SHARES. FOR THE FISCAL YEAR ENDING FEBRUARY 28, 2001, THE
DISTRIBUTOR OF THE FUND HAS CONTRACTUALLY AGREED TO REDUCE ITS DISTRIBUTION
AND SERVICE (12b-1) FEES FOR CLASS A, CLASS B, AND CLASS C SHARES TO .25 OF
1%, .825 OF 1%, AND .75 OF 1% OF THE AVERAGE DAILY NET ASSETS OF CLASS A,
CLASS B, AND CLASS C SHARES, RESPECTIVELY.
- -------------------------------------------------------------------
24 PRUDENTIAL GOVERNMENT INCOME FUND, INC. [LOGO] (800) 225-1852
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
- ------------------------------------------------
REDUCING OR WAIVING CLASS A'S INITIAL SALES CHARGE
The following describes the different ways investors can reduce or avoid
paying Class A's initial sales charge.
INCREASE THE AMOUNT OF YOUR INVESTMENT. You can reduce Class A's initial
sales charge by increasing the amount of your investment. This table shows
how the sales charge decreases as the amount of your investment
increases.
<TABLE>
<CAPTION>
SALES CHARGE AS % SALES CHARGE AS % DEALER
AMOUNT OF PURCHASE OF OFFERING PRICE OF AMOUNT INVESTED REALLOWANCE
<S> <C> <C> <C>
Less than $50,000 4.00% 4.17% 3.75%
$50,000 to $99,999 3.50% 3.63% 3.25%
$100,000 to $249,999 2.75% 2.83% 2.50%
$250,000 to $499,999 2.00% 2.04% 1.90%
$500,000 to $999,999 1.50% 1.52% 1.40%
$1,000,000 and above(1) None None None
</TABLE>
1 IF YOU INVEST $1 MILLION OR MORE, YOU CAN BUY ONLY CLASS A SHARES, UNLESS
YOU QUALIFY TO BUY CLASS Z SHARES.
To satisfy the purchase amounts above, you can:
-- Invest with an eligible group of related investors
-- Buy Class A shares of two or more Prudential mutual funds at the same
time
-- Use your RIGHTS OF ACCUMULATION, which allow you to combine the
current value of Prudential mutual fund shares you already own with
the value of the shares you are purchasing for purposes of
determining the applicable sales charge (note: you must notify the
Transfer Agent if you qualify for Rights of Accumulation)
-- Sign a LETTER OF INTENT, stating in writing that you or an eligible
group of related investors will purchase a certain amount of shares
in the Fund and other Prudential mutual funds within 13 months.
The Distributor may reallow Class A's sales charge to dealers.
BENEFIT PLANS. Certain group retirement and savings plans may purchase Class A
shares without the initial sales charge if they meet the required minimum for
amount of assets, average account balance or number of eligible employees. For
more information about these requirements, call Prudential at (800) 353-2847.
- --------------------------------------------------------------------------------
25
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
- ------------------------------------------------
MUTUAL FUND PROGRAMS. The initial sales charge will be waived for investors in
certain programs sponsored by broker-dealers, investment advisers and financial
planners who have agreements with Prudential Investments Advisory Group relating
to:
-- Mutual fund "wrap" or asset allocation programs, where the sponsor
places Fund trades and charges its clients a management, consulting
or other fee for its services
-- Mutual fund "supermarket" programs, where the sponsor links its
clients' accounts to a master account in the sponsor's name and the
sponsor charges a fee for its services.
Broker-dealers, investment advisers or financial planners sponsoring these
mutual fund programs may offer their clients more than one class of shares in
the Fund in connection with different pricing options for their programs.
Investors should consider carefully any separate transaction and other fees
charged by these programs in connection with investing in each available share
class before selecting a share class.
OTHER TYPES OF INVESTORS. Other investors may pay no sales charges, including
certain officers, employees or agents of Prudential and its affiliates, the
Prudential mutual funds, the subadvisers of the Prudential mutual funds and
registered representatives and employees of brokers that have entered into a
selected dealer agreement with the Distributor. To qualify for a reduction or
waiver of the sales charge, you must notify the Transfer Agent or your broker at
the time of purchase. For more information about reducing or eliminating
Class A's sales charge, see the SAI, "Purchase, Redemption and Pricing of Fund
Shares--Reduction and Waiver of Initial Sales Charge--Class A Shares."
WAIVING CLASS C'S INITIAL SALES CHARGE
BENEFIT PLANS. Certain group retirement plans may purchase Class C shares
without the initial sales charge. For more information, call Prudential at
(800) 353-2847.
INVESTMENT OF REDEMPTION PROCEEDS FROM OTHER INVESTMENT COMPANIES. The initial
sales charge will be waived for purchases of Class C shares if the purchase is
made with money from the redemption of shares of any
- -------------------------------------------------------------------
26 PRUDENTIAL GOVERNMENT INCOME FUND, INC. [LOGO] (800) 225-1852
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
- ------------------------------------------------
unaffiliated investment company, as long as the shares were not held in an
account at Prudential Securities Incorporated (Prudential Securities) or one of
its affiliates. These purchases must be made within 60 days of redemption. To
qualify for this waiver, you must do one of the following:
-- Purchase your shares through an account at Prudential Securities
-- Purchase your shares through an ADVANTAGE Account or an Investor
Account with Pruco Securities Corporation
-- Purchase your shares through another broker.
This waiver is not available to investors who purchase shares directly from
the Transfer Agent. If you are entitled to the waiver, you must notify either
the Transfer Agent or your broker. The Transfer Agent may require any supporting
documents it considers to be appropriate.
QUALIFYING FOR CLASS Z SHARES
BENEFIT PLANS. Certain group retirement plans may purchase Class Z shares if
they meet the required minimum for amount of assets, average account balance or
number of eligible employees. For more information about these requirements,
call Prudential at (800) 353-2847.
MUTUAL FUND PROGRAMS. Class Z shares also can be purchased by participants in
any fee-based program or trust program sponsored by Prudential or an affiliate
that includes the Fund as an available option. Class Z shares also can be
purchased by investors in certain programs sponsored by broker-dealers,
investment advisers and financial planners who have agreements with Prudential
Investments Advisory Group relating to:
-- Mutual fund "wrap" or asset allocation programs, where the sponsor
places Fund trades, links its clients' accounts to a master account
in the sponsor's name and charges its clients a management,
consulting or other fee for its services
-- Mutual fund "supermarket" programs, where the sponsor links its
clients' accounts to a master account in the sponsor's name and the
sponsor charges a fee for its services.
Broker-dealers, investment advisers or financial planners sponsoring these
mutual fund programs may offer their clients more than one class of shares in
the Fund in connection with different pricing options for their programs.
Investors should consider carefully any separate transaction and
- --------------------------------------------------------------------------------
27
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
- ------------------------------------------------
other fees charged by these programs in connection with investing in each
available share class before selecting a share class.
OTHER TYPES OF INVESTORS. Class Z shares also can be purchased by any of the
following:
-- Certain participants in the MEDLEY Program (group variable annuity
contracts) sponsored by Prudential for whom Class Z shares of the
Prudential mutual funds are an available option
-- Current and former Directors/Trustees of the Prudential mutual funds
(including the Fund)
-- Prudential, with an investment of $10 million or more.
In connection with the sale of shares, the Manager, the Distributor or one
of their affiliates may pay brokers, financial advisers and other persons a
commission of up to 4% of the purchase price for Class B shares, up to 2% of the
purchase price for Class C shares and a finder's fee for Class A or Class Z
shares from their own resources based on a percentage of the net asset value of
shares sold or otherwise.
CLASS B SHARES CONVERT TO CLASS A SHARES AFTER APPROXIMATELY SEVEN YEARS
If you buy Class B shares and hold them for approximately seven years, we will
automatically convert them into Class A shares without charge. At that time, we
will also convert any Class B shares that you purchased with reinvested
dividends and other distributions. Since the 12b-1 fees for Class A shares are
lower than for Class B shares, converting to Class A shares lowers your Fund
expenses.
When we do the conversion, you will get fewer Class A shares than the number
of converted Class B shares if the price of the Class A shares is higher than
the price of Class B shares. The total dollar value will be the same, so you
will not have lost any money by getting fewer Class A shares. We do the
conversions quarterly, not on the anniversary date of your purchase. For more
information, see the SAI, "Purchase, Redemption and Pricing of Fund
Shares--Class B Shares."
STEP 3: UNDERSTANDING THE PRICE YOU'LL PAY
The price you pay for each share of the Fund is based on the share value. The
share value of a mutual fund--known as the NET ASSET VALUE or
NAV--is determined by a simple calculation: it's the total value of the Fund
- -------------------------------------------------------------------
28 PRUDENTIAL GOVERNMENT INCOME FUND, INC. [LOGO] (800) 225-1852
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HOW TO BUY, SELL AND
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- ------------------------------------------------
(assets minus liabilities) divided by the total number of shares outstanding.
For example, if the value of the investments held by Fund XYZ (minus its
liabilities) is $1,000 and there are 100 shares of Fund XYZ owned by
shareholders, the price of one share of the fund--or the NAV--is $10 ($1,000
divided by 100). Portfolio securities are valued based upon market quotations
or, if not readily available, at fair value as determined in good faith under
procedures established by the Fund's Board. Most national newspapers report the
NAVs of most mutual funds, which allows investors to check the price of mutual
funds daily.
We determine the NAV of our shares once each business day at 4:15 p.m., New
York time, on days that the New York Stock Exchange (NYSE) is open for trading.
The NYSE is closed on most national holidays and Good Friday. Because the Fund
may invest in foreign securities, its NAV may change on days when you cannot buy
or sell Fund shares. We do not determine the NAV on days when we have not
received any orders to purchase, sell or exchange Fund shares, or when changes
in the value of the Fund's portfolio do not materially affect the NAV.
WHAT PRICE WILL YOU PAY FOR SHARES OF THE FUND?
For Class A and Class C shares, you'll pay the public offering price, which is
the NAV next determined after we receive your order to purchase, plus an initial
sales charge (unless you're entitled to a waiver). For Class B and Class Z
shares, you will pay the NAV next determined after we receive your order to
purchase (remember, there are no up-front sales charges for these share
classes). Your broker may charge you a separate or additional fee for purchases
of shares.
- -------------------------------------------------------------------
MUTUAL FUND SHARES
The NAV of mutual fund shares changes every day because the value of a fund's
portfolio changes constantly. For example, if Fund XYZ holds ACME Corp. bonds in
its portfolio and the price of ACME bonds goes up while the value of the fund's
other holdings remains the same and expenses don't change, the NAV of Fund XYZ
will increase.
- -------------------------------------------------------------------
- --------------------------------------------------------------------------------
29
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
- ------------------------------------------------
STEP 4: ADDITIONAL SHAREHOLDER SERVICES
As a Fund shareholder, you can take advantage of the following services and
privileges:
AUTOMATIC REINVESTMENT. As we explained in the "Fund Distributions and Tax
Issues" section, the Fund pays out--or distributes--its net investment income
and capital gains to all shareholders. For your convenience, we will
automatically reinvest your distributions in the Fund at NAV, without any sales
charge. If you want your distributions paid in cash, you can indicate this
preference on your application, notify your broker, or notify the Transfer Agent
in writing (at the address below) at least five business days before the date we
determine who receives dividends.
PRUDENTIAL MUTUAL FUND SERVICES LLC
ATTN: ACCOUNT MAINTENANCE
P.O. BOX 15015
NEW BRUNSWICK, NJ 08906-5015
AUTOMATIC INVESTMENT PLAN. You can make regular purchases of the Fund for as
little as $50 by having the money automatically withdrawn from your bank or
brokerage account at specified intervals.
RETIREMENT PLAN SERVICES. Prudential offers a wide variety of retirement plans
for individuals and institutions, including large and small businesses. For
information on IRAs, including Roth IRAs or SEP-IRAs for a one-person business,
please contact your financial adviser. If you are interested in opening a 401(k)
or other company-sponsored retirement plan (SIMPLEs, SEP plans, Keoghs, 403(b)
plans, pension and profit-sharing plans), your financial adviser will help you
determine which retirement plan best meets your needs. Complete instructions
about how to establish and maintain your plan and how to open accounts for you
and your employees will be included in the retirement plan kit you receive in
the mail.
THE PRUTECTOR PROGRAM. Optional group term life insurance--which protects the
value of your Prudential mutual fund investment for your beneficiaries against
market declines--is available to investors who purchase their shares through
Prudential. Eligible investors who apply for PruTector coverage after the
initial 6-month enrollment period will need to provide satisfactory
- -------------------------------------------------------------------
30 PRUDENTIAL GOVERNMENT INCOME FUND, INC. [LOGO] (800) 225-1852
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
- ------------------------------------------------
evidence of insurability. This insurance is subject to other restrictions and is
not available in all states.
SYSTEMATIC WITHDRAWAL PLAN. A systematic withdrawal plan is available that will
provide you with monthly, quarterly, semi-annual or annual redemption checks.
Remember, the sale of Class B and Class C shares may be subject to a CDSC.
REPORTS TO SHAREHOLDERS. Every year we will send you an annual report (along
with an updated prospectus) and a semi-annual report, which contain important
financial information about the Fund. To reduce Fund expenses, we will send one
annual shareholder report, one semi-annual shareholder report and one annual
prospectus per household, unless you instruct us or your broker otherwise.
HOW TO SELL YOUR SHARES
You can sell your shares of the Fund for cash (in the form of a check) at any
time, subject to certain restrictions.
When you sell shares of the Fund--also known as redeeming your shares--the
price you will receive will be the NAV next determined after the Transfer Agent,
the Distributor or your broker receives your order to sell (less any applicable
CDSC). If your broker holds your shares, your broker must receive your order to
sell by 4:15 p.m., New York time, to process the sale on that day. Otherwise,
contact:
PRUDENTIAL MUTUAL FUND SERVICES LLC
ATTN: REDEMPTION SERVICES
P.O. BOX 15010
NEW BRUNSWICK, NJ 08906-5010
Generally, we will pay you for the shares that you sell within seven days
after the Transfer Agent, the Distributor or your broker receives your sell
order. If you hold shares through a broker, payment will be credited to your
account. If you are selling shares you recently purchased with a check, we may
delay sending you the proceeds until your check clears, which can take up to 10
days from the purchase date. You can avoid delay if you purchase by wire,
certified check or cashier's check. Your broker may charge you a separate or
additional fee for sales of shares.
- --------------------------------------------------------------------------------
31
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
- ------------------------------------------------
RESTRICTIONS ON SALES
There are certain times when you may not be able to sell shares of the Fund, or
when we may delay paying you the proceeds from a sale. As permitted by the
Securities and Exchange Commission, this may happen only during unusual market
conditions or emergencies when the Fund can't determine the value of its assets
or sell its holdings. For more information, see the SAI, "Purchase, Redemption
and Pricing of Fund Shares--Sale of Shares."
If you are selling more than $100,000 of shares, if you want the check
payable or sent to someone or some place that is not in our records, or you are
a business or a trust and if you hold your shares directly with the Transfer
Agent, you will need to have the signature on your sell order signature
guaranteed by an "eligible guarantor institution." An "eligible guarantor
institution" includes any bank, broker-dealer or credit union. For more
information, see the SAI, "Purchase, Redemption and Pricing of Fund Shares--Sale
of Shares--Signature Guarantee."
CONTINGENT DEFERRED SALES CHARGE (CDSC)
If you sell Class B shares within six years of purchase or Class C shares within
18 months of purchase (one year for Class C shares purchased before November 2,
1998), you will have to pay a CDSC. To keep the CDSC as low as possible, we will
sell amounts representing shares in the following order:
-- Amounts representing shares you purchased with reinvested dividends
and distributions
-- Amounts representing the increase in NAV above the total amount of
payments for shares made during the past six years for Class B shares
and 18 months for Class C shares (one year for Class C shares
purchased before November 2, 1998)
-- Amounts representing the cost of shares held beyond the CDSC period
(six years for Class B shares and 18 months for Class C shares).
Since shares that fall into any of the categories listed above are not
subject to the CDSC, selling them first helps you to avoid--or at least
minimize--the CDSC.
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32 PRUDENTIAL GOVERNMENT INCOME FUND, INC. [LOGO] (800) 225-1852
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- ------------------------------------------------
Having sold the exempt shares first, if there are any remaining shares that
are subject to the CDSC, we will apply the CDSC to amounts representing the cost
of shares held for the longest period of time within the applicable CDSC period.
As we noted before in the "Share Class Comparison" chart, the CDSC for
Class B shares is 5% in the first year, 4% in the second, 3% in the third, 2% in
the fourth, and 1% in the fifth and sixth years. The rate decreases on the first
day of the month following the anniversary date of your purchase, not on the
anniversary date itself. The CDSC is 1% for Class C shares--which is applied to
shares sold within 18 months of purchase (one year for Class C shares purchased
before November 2, 1998). For both Class B and Class C shares, the CDSC is
calculated based on the lesser of the original purchase price or the redemption
proceeds. For purposes of determining how long you've held your shares, all
purchases during the month are grouped together and considered to have been made
on the last day of the month.
The holding period for purposes of determining the applicable CDSC will be
calculated from the first day of the month after purchase, excluding any time
shares were held in a money market fund.
WAIVER OF THE CDSC--CLASS B SHARES
The CDSC will be waived if the Class B shares are sold:
-- After a shareholder is deceased or disabled (or, in the case of a
trust account, the death or disability of the grantor). This waiver
applies to individual shareholders, as well as shares owned in joint
tenancy, provided the shares were purchased before the death or
disability
-- To provide for certain distributions--made without IRS penalty--from
a qualified or tax-deferred retirement plan, IRA or Section 403(b)
custodial account
-- On certain sales from a Systematic Withdrawal Plan.
For more information on the above and other waivers, see the SAI, "Purchase,
Redemption and Pricing of Fund Shares--Contingent Deferred Sales Charge--Waiver
of Contingent Deferred Sales Charge--Class B Shares."
- --------------------------------------------------------------------------------
33
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
- ------------------------------------------------
WAIVER OF THE CDSC--CLASS C SHARES
BENEFIT PLANS. The CDSC will be waived for redemptions by certain group
retirement plans for which Prudential or brokers not affiliated with Prudential
provide administrative or recordkeeping services. The CDSC also will be waived
for certain redemptions by benefit plans sponsored by Prudential and its
affiliates. For more information, call Prudential at (800) 353-2847.
REDEMPTION IN KIND
If the sales of Fund shares you make during any 90-day period reach the lesser
of $250,000 or 1% of the value of the Fund's net assets, we can then give you
securities from the Fund's portfolio instead of cash. If you want to sell the
securities for cash, you would have to pay the costs charged by a broker.
SMALL ACCOUNTS
If you make a sale that reduces your account value to less than $500, we may
sell the rest of your shares (without charging any CDSC) and close your account.
We would do this to minimize the Fund's expenses paid by other shareholders. We
will give you 60 days' notice, during which time you can purchase additional
shares to avoid this action. This involuntary sale does not apply to
shareholders who own their shares as part of a 401(k) plan, an IRA, or some
other qualified or tax-deferred plan or account.
90-DAY REPURCHASE PRIVILEGE
After you redeem your shares, you have a 90-day period during which you may
reinvest back into your account any of the redemption proceeds in shares of the
same Fund without paying an initial sales charge. Also, if you paid a CDSC when
you redeemed your shares, we will credit your account with the appropriate
number of shares to reflect the amount of the CDSC you paid on that reinvested
portion of your redemption proceeds. In order to take advantage of this one-time
privilege, you must notify the Transfer Agent or your broker at the time of the
repurchase. See the SAI, "Purchase, Redemption and Pricing of Fund Shares--Sale
of Shares."
- -------------------------------------------------------------------
34 PRUDENTIAL GOVERNMENT INCOME FUND, INC. [LOGO] (800) 225-1852
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
- ------------------------------------------------
RETIREMENT PLANS
To sell shares and receive a distribution from your retirement account, call
your broker or the Transfer Agent for a distribution request form. There are
special distribution and income tax withholding requirements for distributions
from retirement plans and you must submit a withholding form with your request
to avoid delay. If your retirement plan account is held for you by your employer
or plan trustee, you must arrange for the distribution request to be signed and
sent by the plan administrator or trustee. For additional information, see the
SAI.
HOW TO EXCHANGE YOUR SHARES
You can exchange your shares of the Fund for shares of the same class in certain
other Prudential mutual funds--including certain money market funds--if you
satisfy the minimum investment requirements. For example, you can exchange
Class A shares of the Fund for Class A shares of another Prudential mutual fund,
but you can't exchange Class A shares for Class B, Class C or Class Z shares.
Class B and Class C shares may not be exchanged into money market funds other
than Prudential Special Money Market Fund, Inc. After an exchange, at redemption
the CDSC will be calculated from the first day of the month after initial
purchase, excluding any time shares were held in a money market fund. We may
change the terms of the exchange privilege after giving you 60 days' notice.
If you hold shares through a broker, you must exchange shares through your
broker. Otherwise contact:
PRUDENTIAL MUTUAL FUND SERVICES LLC
ATTN: EXCHANGE PROCESSING
P.O. BOX 15010
NEW BRUNSWICK, NJ 08906-5010
There is no sales charge for exchanges. If, however, you exchange--and then
sell--Class B shares within approximately six years of your original purchase or
Class C shares within 18 months of your original purchase, you must still pay
the applicable CDSC. If you have exchanged Class B or Class C shares into a
money market fund, the time you hold the shares in the money market account will
not be counted in calculating the required holding period for CDSC liability.
- --------------------------------------------------------------------------------
35
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
- ------------------------------------------------
Remember, as we explained in the section entitled "Fund Distributions and
Tax Issues--If You Sell or Exchange Your Shares," exchanging shares is
considered a sale for tax purposes. Therefore, if the shares you exchange are
worth more than you paid for them, you may have to pay capital gains tax. For
additional information about exchanging shares, see the SAI, "Shareholder
Investment Account--Exchange Privilege."
If you own Class B or Class C shares and qualify to purchase Class A shares
without paying an initial sales charge, we will automatically exchange your
Class B or Class C shares which are not subject to a CDSC for Class A shares. We
make such exchanges on a quarterly basis if you qualify for this exchange
privilege. We have obtained a legal opinion that this exchange is not a "taxable
event" for federal income tax purposes. This opinion is not binding on the IRS.
FREQUENT TRADING
Frequent trading of Fund shares in response to short-term fluctuations in the
market--also known as "market timing"--may make it very difficult to manage the
Fund's investments. When market timing occurs, the Fund may have to sell
portfolio securities to have the cash necessary to redeem the market timer's
shares. This can happen at a time when it is not advantageous to sell any
securities, so the Fund's performance may be hurt. When large dollar amounts are
involved, market timing can also make it difficult to use long-term investment
strategies because we cannot predict how much cash the Fund will have to invest.
When, in our opinion, such activity would have a disruptive effect on portfolio
management, the Fund reserves the right to refuse purchase orders and exchanges
into the Fund by any person, group or commonly controlled account. The decision
may be based upon dollar amount, volume and frequency of trading. The Fund may
notify a market timer of rejection of an exchange or purchase order after the
day the order is placed. If the Fund allows a market timer to trade Fund shares,
it may require the market timer to enter into a written agreement to follow
certain procedures and limitations.
TELEPHONE REDEMPTIONS OR EXCHANGES
You may redeem or exchange your shares in any amount by calling the Fund at
(800) 225-1852 before 4:15 p.m. New York time. You will receive a redemption
amount based on that day's NAV.
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36 PRUDENTIAL GOVERNMENT INCOME FUND, INC. [LOGO] (800) 225-1852
<PAGE>
HOW TO BUY, SELL AND
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- ------------------------------------------------
The Fund's Transfer Agent will record your telephone instructions and
request specific account information before redeeming or exchanging shares. The
Fund will not be liable if it follows instructions that it reasonably believes
are made by the shareholder. If the Fund does not follow reasonable procedures,
it may be liable for losses due to unauthorized or fraudulent telephone
instructions.
In the event of drastic economic or market changes, you may have difficulty
in redeeming or exchanging your shares by telephone. If this occurs, you should
consider redeeming or exchanging your shares by mail.
The telephone redemption and exchange privileges may be modified or
terminated at any time. If this occurs, you will receive a written notice from
the Fund.
- --------------------------------------------------------------------------------
37
<PAGE>
FINANCIAL HIGHLIGHTS
- -------------------------------------
The financial highlights will help you evaluate the Fund's financial
performance. The TOTAL RETURN in each chart represents the rate that a
shareholder earned on an investment in that share class of the Fund, assuming
reinvestment of all dividends and other distributions. The information is for
each share class for the periods indicated.
Review each chart with the financial statements and the report of
independent accountants, which appear in the annual report and the SAI and are
available upon request. Additional performance information for each share class
is contained in the annual report, which you can receive at no charge.
CLASS A SHARES
The financial highlights for the three years ended February 29, 2000, were
audited by PricewaterhouseCoopers LLP, independent accountants, and the
financial highlights for the two years ended February 28, 1997, were audited by
other independent auditors, whose reports were unqualified.
CLASS A SHARES (FISCAL YEARS ENDED 2-28/29)
<TABLE>
<CAPTION>
PER SHARE OPERATING PERFORMANCE 2000 1999 1998 1997 1996
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $8.98 $9.05 $8.76 $9.04 $8.59
INCOME FROM INVESTMENT OPERATIONS:
Net investment income(2) 0.55 0.55 0.58 0.60 0.60
Net realized and unrealized gain
(loss) on investment transactions (0.57) (0.07) 0.29 (0.28) 0.45
TOTAL FROM INVESTMENT OPERATIONS (0.02) 0.48 0.87 0.32 1.05
- --------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment
income (0.55) (0.55) (0.58) (0.60) (0.60)
NET ASSET VALUE, END OF YEAR $8.41 $8.98 $9.05 $8.76 $9.04
TOTAL RETURN(1) (0.15)% 5.40% 10.26% 3.70% 12.41%
- --------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA 2000 1999 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------
NET ASSETS, END OF YEAR (000) $806,620 $895,039 $819,536 $860,319 $945,038
Average net assets (000) $857,586 $836,143 $842,431 $884,862 $909,169
RATIOS TO AVERAGE NET ASSETS:(2)
Expenses, including distribution
and service (12b-1) fees 0.94% 0.84% 0.86% 0.90% 0.91%
Expenses, excluding distribution
and service (12b-1) fees 0.69% 0.68% 0.71% 0.75% 0.76%
Net investment income 6.39% 6.05% 6.52% 6.78% 6.65%
Portfolio turnover rate 68% 106% 88% 107% 123%
</TABLE>
1 TOTAL RETURN ASSUMES REINVESTMENT OF DIVIDENDS AND ANY OTHER DISTRIBUTIONS,
BUT DOES NOT INCLUDE THE EFFECT OF SALES CHARGES. IT IS CALCULATED ASSUMING
SHARES ARE PURCHASED ON THE FIRST DAY AND SOLD ON THE LAST DAY OF EACH YEAR
REPORTED.
2 NET OF EXPENSE SUBSIDY AND/OR FEE WAIVER.
- -------------------------------------------------------------------
38 PRUDENTIAL GOVERNMENT INCOME FUND, INC. [LOGO] (800) 225-1852
<PAGE>
FINANCIAL HIGHLIGHTS
- ------------------------------------------------
CLASS B SHARES
The financial highlights for the three years ended February 29, 2000, were
audited by PricewaterhouseCoopers LLP, independent accountants, and the
financial highlights for the two years ended February 28, 1997, were audited by
other independent auditors, whose reports were unqualified.
CLASS B SHARES (FISCAL YEARS ENDED 2-28/29)
<TABLE>
<CAPTION>
PER SHARE OPERATING PERFORMANCE 2000 1999 1998 1997 1996
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $8.99 $9.05 $8.77 $9.04 $8.60
INCOME FROM INVESTMENT OPERATIONS:
Net investment income(2) 0.50 0.49 0.52 0.54 0.54
Net realized and unrealized gain
(loss) on investment transactions (0.58) (0.06) 0.28 (0.27) 0.44
TOTAL FROM INVESTMENT OPERATIONS (0.08) 0.43 0.80 0.27 0.98
- ----------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment
income (0.50) (0.49) (0.52) (0.54) (0.54)
NET ASSET VALUE, END OF YEAR $8.41 $8.99 $9.05 $8.77 $9.04
TOTAL RETURN(1) (0.83)% 4.83% 9.40% 3.12% 11.54%
- ----------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA 2000 1999 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------
NET ASSETS, END OF YEAR (000) $193,394 $343,425 $346,059 $461,988 $641,946
Average net assets (000) $262,863 $322,626 $385,145 $543,796 $647,515
RATIOS TO AVERAGE NET ASSETS:(2)
Expenses, including distribution
and service (12b-1) fees 1.52% 1.50% 1.53% 1.57% 1.58%
Expenses, excluding distribution
and service (12b-1) fees 0.69% 0.68% 0.71% 0.75% 0.76%
Net investment income 5.77% 5.39% 5.85% 6.11% 5.99%
Portfolio turnover 68% 106% 88% 107% 123%
</TABLE>
1 TOTAL RETURN ASSUMES REINVESTMENT OF DIVIDENDS AND ANY OTHER DISTRIBUTIONS,
BUT DOES NOT INCLUDE THE EFFECT OF SALES CHARGES. IT IS CALCULATED ASSUMING
SHARES ARE PURCHASED ON THE FIRST DAY AND SOLD ON THE LAST DAY OF EACH YEAR
REPORTED.
2 NET OF EXPENSE SUBSIDY AND/OR FEE WAIVER.
- --------------------------------------------------------------------------------
39
<PAGE>
FINANCIAL HIGHLIGHTS
- ------------------------------------------------
CLASS C SHARES
The financial highlights for the three years ended February 29, 2000, were
audited by PricewaterhouseCoopers LLP, independent accountants, and the
financial highlights for the two years ended February 28, 1997, were audited by
other independent auditors, whose reports were unqualified.
CLASS C SHARES (FISCAL YEARS ENDED 2-28/29)
<TABLE>
<CAPTION>
PER SHARE OPERATING PERFORMANCE 2000 1999 1998 1997 1996
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $8.99 $9.05 $8.77 $9.04 $8.60
INCOME FROM INVESTMENT OPERATIONS:
Net investment income(2) 0.51 0.50 0.53 0.54 0.54
Net realized and unrealized gain
(loss) on investment transactions (0.58) (0.06) 0.28 (0.27) 0.44
TOTAL FROM INVESTMENT OPERATIONS (0.07) 0.44 0.81 0.27 0.98
- -------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment
income (0.51) (0.50) (0.53) (0.54) (0.54)
NET ASSET VALUE, END OF YEAR $8.41 $8.99 $9.05 $8.77 $9.04
TOTAL RETURN(1) (0.76)% 4.91% 9.48% 3.20% 11.63%
- -------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA 2000 1999 1998 1997 1996
- -------------------------------------------------------------------------------------------------------
NET ASSETS, END OF YEAR (000) $8,508 $8,236 $2,840 $2,569 $1,799
Average net assets (000) $9,014 $4,878 $2,523 $2,440 $765
RATIOS TO AVERAGE NET ASSETS:(2)
Expenses, including distribution
and service (12b-1) fees 1.44% 1.43% 1.46% 1.50% 1.51%
Expenses, excluding distribution
and service (12b-1) fees 0.69% 0.68% 0.71% 0.75% 0.76%
Net investment income 5.90% 5.50% 5.92% 6.19% 5.99%
Portfolio turnover 68% 106% 88% 107% 123%
</TABLE>
1 TOTAL RETURN ASSUMES REINVESTMENT OF DIVIDENDS AND ANY OTHER DISTRIBUTIONS,
BUT DOES NOT INCLUDE THE EFFECT OF SALES CHARGES. IT IS CALCULATED ASSUMING
SHARES ARE PURCHASED ON THE FIRST DAY AND SOLD ON THE LAST DAY OF EACH YEAR
REPORTED.
2 NET OF EXPENSE SUBSIDY AND/OR FEE WAIVER.
- -------------------------------------------------------------------
40 PRUDENTIAL GOVERNMENT INCOME FUND, INC. [LOGO] (800) 225-1852
<PAGE>
FINANCIAL HIGHLIGHTS
- ------------------------------------------------
CLASS Z SHARES
The financial highlights for the three years ended February 29, 2000, were
audited by PricewaterhouseCoopers LLP, independent accountants, and the
financial highlights for the period from March 1, 1996, through February 28,
1997, were audited by other independent auditors, whose reports were
unqualified.
CLASS Z SHARES (FISCAL YEARS ENDED 2-28/29)
<TABLE>
<CAPTION>
PER SHARE OPERATING PERFORMANCE 2000 1999 1998 1997(1)
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $8.97 $9.04 $8.76 $9.13
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.57 0.57 0.59 0.61
Net realized and unrealized gain
(loss) on investment transactions (0.57) (0.07) 0.28 (0.37)
TOTAL FROM INVESTMENT OPERATIONS -- 0.50 0.87 0.24
- -------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment
income (0.57) (0.57) (0.59) (0.61)
NET ASSET VALUE, END OF YEAR $8.40 $8.97 $9.04 $8.76
TOTAL RETURN(2) 0.09% 5.58% 10.30% 3.16%
- -------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA 2000 1999 1998 1997
- -------------------------------------------------------------------------------------------
NET ASSETS, END OF YEAR (000) $93,390 $97,629 $84,733 $73,411
Average net assets (000) $97,811 $86,892 $71,425 $39,551
RATIOS TO AVERAGE NET ASSETS:
Expenses 0.69% 0.68% 0.71% 0.75%(3)
Net investment income 6.64% 6.22% 6.67% 6.76%(3)
Portfolio turnover 68% 106% 88% 107%
</TABLE>
1 INFORMATION SHOWN IS FOR THE PERIOD FROM MARCH 4, 1996 (WHEN CLASS Z SHARES
WERE FIRST OFFERED) THROUGH FEBRUARY 28, 1997.
2 TOTAL RETURN ASSUMES REINVESTMENT OF DIVIDENDS AND ANY OTHER DISTRIBUTIONS.
IT IS CALCULATED ASSUMING SHARES ARE PURCHASED ON THE FIRST DAY AND SOLD ON
THE LAST DAY OF EACH YEAR REPORTED. TOTAL RETURNS FOR PERIODS OF LESS THAN
A FULL YEAR ARE NOT ANNUALIZED.
3 ANNUALIZED.
- --------------------------------------------------------------------------------
41
<PAGE>
- -------------------------------------
NOTES
- -------------------------------------------------------------------
42 PRUDENTIAL GOVERNMENT INCOME FUND, INC. [LOGO] (800) 225-1852
<PAGE>
- ------------------------------------------------
NOTES
- --------------------------------------------------------------------------------
43
<PAGE>
THE PRUDENTIAL MUTUAL FUND FAMILY
- -------------------------------------
Prudential offers a broad range of mutual funds designed to meet your individual
needs. For information about these funds, contact your financial adviser or call
us at (800) 225-1852. Read the prospectus carefully before you invest or send
money.
STOCK FUNDS
PRUDENTIAL EMERGING GROWTH FUND,
INC.
PRUDENTIAL EQUITY FUND, INC.
PRUDENTIAL EQUITY INCOME FUND
PRUDENTIAL INDEX SERIES FUND
PRUDENTIAL SMALL-CAP INDEX FUND
PRUDENTIAL STOCK INDEX FUND
THE PRUDENTIAL INVESTMENT
PORTFOLIOS, INC.
PRUDENTIAL JENNISON GROWTH FUND
PRUDENTIAL JENNISON GROWTH &
INCOME FUND
PRUDENTIAL MID-CAP VALUE FUND
PRUDENTIAL REAL ESTATE SECURITIES FUND
PRUDENTIAL SECTOR FUNDS, INC.
PRUDENTIAL FINANCIAL SERVICES FUND
PRUDENTIAL HEALTH SCIENCES FUND
PRUDENTIAL TECHNOLOGY FUND
PRUDENTIAL UTILITY FUND
PRUDENTIAL SMALL-CAP QUANTUM FUND, INC.
PRUDENTIAL SMALL COMPANY VALUE
FUND, INC.
PRUDENTIAL TAX-MANAGED FUNDS
PRUDENTIAL TAX-MANAGED EQUITY FUND
PRUDENTIAL 20/20 FOCUS FUND
NICHOLAS-APPLEGATE FUND, INC.
NICHOLAS-APPLEGATE GROWTH EQUITY FUND
TARGET FUNDS
LARGE CAPITALIZATION GROWTH FUND
LARGE CAPITALIZATION VALUE FUND
SMALL CAPITALIZATION GROWTH FUND
SMALL CAPITALIZATION VALUE FUND
ASSET ALLOCATION/BALANCED FUNDS
PRUDENTIAL BALANCED FUND
PRUDENTIAL DIVERSIFIED FUNDS
CONSERVATIVE GROWTH FUND
MODERATE GROWTH FUND
HIGH GROWTH FUND
THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.
PRUDENTIAL ACTIVE BALANCED FUND
GLOBAL FUNDS
GLOBAL STOCK FUNDS
PRUDENTIAL DEVELOPING MARKETS FUND
PRUDENTIAL DEVELOPING MARKETS EQUITY FUND
PRUDENTIAL LATIN AMERICA EQUITY
FUND
PRUDENTIAL EUROPE GROWTH FUND, INC.
PRUDENTIAL GLOBAL GENESIS FUND, INC.
PRUDENTIAL INDEX SERIES FUND
PRUDENTIAL EUROPE INDEX FUND
PRUDENTIAL PACIFIC INDEX FUND
PRUDENTIAL NATURAL RESOURCES FUND, INC.
PRUDENTIAL PACIFIC GROWTH FUND, INC.
PRUDENTIAL WORLD FUND, INC.
PRUDENTIAL GLOBAL GROWTH FUND
PRUDENTIAL INTERNATIONAL VALUE FUND
PRUDENTIAL JENNISON INTERNATIONAL GROWTH FUND
GLOBAL UTILITY FUND, INC.
TARGET FUNDS
INTERNATIONAL EQUITY FUND
GLOBAL BOND FUNDS
PRUDENTIAL GLOBAL TOTAL RETURN FUND, INC.
PRUDENTIAL INTERNATIONAL BOND FUND, INC.
- -------------------------------------------------------------------
44 PRUDENTIAL GOVERNMENT INCOME FUND, INC. [LOGO] (800) 225-1852
<PAGE>
BOND FUNDS
TAXABLE BOND FUNDS
PRUDENTIAL DIVERSIFIED BOND
FUND, INC.
PRUDENTIAL GOVERNMENT INCOME
FUND, INC.
PRUDENTIAL GOVERNMENT SECURITIES
TRUST
SHORT-INTERMEDIATE TERM SERIES
PRUDENTIAL HIGH YIELD FUND, INC.
PRUDENTIAL HIGH YIELD TOTAL RETURN FUND, INC.
PRUDENTIAL INDEX SERIES FUND
PRUDENTIAL BOND MARKET INDEX FUND
PRUDENTIAL SHORT-TERM CORPORATE BOND
FUND, INC.
INCOME PORTFOLIO
TARGET FUNDS
TOTAL RETURN BOND FUND
TAX-EXEMPT BOND FUNDS
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
CALIFORNIA SERIES
CALIFORNIA INCOME SERIES
PRUDENTIAL MUNICIPAL BOND FUND
HIGH INCOME SERIES
INSURED SERIES
PRUDENTIAL MUNICIPAL SERIES FUND
FLORIDA SERIES
MASSACHUSETTS SERIES
NEW JERSEY SERIES
NEW YORK SERIES
NORTH CAROLINA SERIES
OHIO SERIES
PENNSYLVANIA SERIES
PRUDENTIAL NATIONAL MUNICIPALS
FUND, INC.
MONEY MARKET FUNDS
TAXABLE MONEY MARKET FUNDS
CASH ACCUMULATION TRUST
LIQUID ASSETS FUND
NATIONAL MONEY MARKET FUND
PRUDENTIAL GOVERNMENT SECURITIES
TRUST
MONEY MARKET SERIES
U.S. TREASURY MONEY MARKET SERIES
PRUDENTIAL SPECIAL MONEY MARKET
FUND, INC.
MONEY MARKET SERIES
PRUDENTIAL MONEYMART ASSETS, INC.
TAX-FREE MONEY MARKET FUNDS
PRUDENTIAL TAX-FREE MONEY FUND, INC.
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
CALIFORNIA MONEY MARKET SERIES
PRUDENTIAL MUNICIPAL SERIES FUND
CONNECTICUT MONEY MARKET SERIES
MASSACHUSETTS MONEY MARKET SERIES
NEW JERSEY MONEY MARKET SERIES
NEW YORK MONEY MARKET SERIES
COMMAND FUNDS
COMMAND MONEY FUND
COMMAND GOVERNMENT FUND
COMMAND TAX-FREE FUND
INSTITUTIONAL MONEY MARKET FUNDS
PRUDENTIAL INSTITUTIONAL LIQUIDITY PORTFOLIO, INC.
INSTITUTIONAL MONEY MARKET SERIES
- --------------------------------------------------------------------------------
45
<PAGE>
FOR MORE INFORMATION
Please read this prospectus before you invest in the Fund and keep it for future
reference. For information or shareholder questions contact
PRUDENTIAL MUTUAL FUND SERVICES LLC
P.O. BOX 15005
NEW BRUNSWICK, NJ 08906-5005
(800) 225-1852
(732) 482-7555 (Calling from outside the U.S.)
Outside Brokers should contact
PRUDENTIAL INVESTMENT MANAGEMENT
SERVICES LLC
P.O. BOX 15035
NEW BRUNSWICK, NJ 08906-5035
(800) 778-8769
Visit Prudential's website at
http://www.prudential.com
Additional information about the Fund can
be obtained without charge and can be
found in the following documents
STATEMENT OF ADDITIONAL INFORMATION (SAI)
(incorporated by reference into this prospectus)
ANNUAL REPORT
(contains a discussion of the market conditions and investment strategies that
significantly affected the Fund's performance)
SEMI-ANNUAL REPORT
You can also obtain copies of Fund documents from the Securities and Exchange
Commission as follows
BY MAIL
Securities and Exchange Commission
Public Reference Section
Washington, DC 20549-0102
BY ELECTRONIC REQUEST
[email protected]
(The SEC charges a fee to copy documents.)
IN PERSON
Public Reference Room in Washington, DC
(For hours of operation, call)
1-202-942-8090
VIA THE INTERNET
on the EDGAR Database at
http://www.sec.gov
CUSIP Numbers NASDAQ Symbols
Class A Shares--744339-10-2 PGVAX
Class B Shares--744339-20-1 PBGPX
Class C Shares--744339-30-0 --
Class Z Shares--744339-40-9 PGVZX
Investment Company Act File No. 811-3712
MF128A
[RECYCLED LOGO]
Printed on Recycled Paper
<PAGE>
PRUDENTIAL GOVERNMENT INCOME FUND, INC.
STATEMENT OF ADDITIONAL INFORMATION
DATED MAY 4, 2000
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. See "Description of the Fund, Its Investments and
Risks."
The Fund's address is Gateway Center Three, 100 Mulberry Street, Newark, New
Jersey 07102-4077, 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 4, 2000, a copy of
which may be obtained from the Fund upon request.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Fund History.......................................... B-2
Description of the Fund, Its Investments and Risks.... B-2
Investment Restrictions............................... B-20
Management of the Fund................................ B-21
Control Persons and Principal Holders of Securities... B-25
Investment Advisory and Other Services................ B-25
Brokerage Allocation and Other Practices.............. B-30
Capital Shares, Other Securities and Organization..... B-32
Purchase, Redemption and Pricing of Fund Shares....... B-32
Shareholder Investment Account........................ B-42
Net Asset Value....................................... B-46
Taxes, Dividends and Distributions.................... B-47
Performance Information............................... B-50
Financial Statements.................................. B-53
Report of Independent Accountants..................... B-77
Appendix I -- Historical Performance Data............. I-1
Appendix II -- General Investment Information......... II-1
</TABLE>
- --------------------------------------------------------------------------------
MF128B
<PAGE>
FUND HISTORY
The Fund was organized under the laws of Maryland on April 8, 1983.
DESCRIPTION OF THE FUND, ITS INVESTMENTS AND RISKS
(a) CLASSIFICATION. The Fund is a diversified, open-end management investment
company.
(b) AND (c) INVESTMENT STRATEGIES, POLICIES AND RISKS.
The Fund will seek to achieve its investment objective of high current
return 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. The Fund will also
write covered call options and covered put options and purchasing put and call
options. Under normal market conditions, at least 65% of the total assets of the
Fund will be invested in U.S. Government securities. 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.
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. 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. While the principal investment policies and
strategies for seeking to achieve this objective are described in the Fund's
Prospectus, the Fund may from time to time also use the securities, instruments,
policies and principal and non-principal strategies described below in seeking
to achieve its objective. 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
U.S. TREASURY SECURITIES. The Fund may invest in U.S. Treasury securities,
including bills, notes, bonds and other debt securities issued by the U.S.
Treasury. These instruments are direct obligations of the U.S. Government and,
as such, are backed by the full faith and credit of the United States. They
differ primarily in their interest rates, the lengths of their maturities and
the dates of their issuances. U.S. Government guarantees do not extend to the
yield or value of the securities or the Fund's shares.
SECURITIES ISSUED OR GUARANTEED BY U.S. GOVERNMENT AGENCIES AND
INSTRUMENTALITIES. The Fund may invest in securities issued by the
U.S. Government, its 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. Securities in which the Fund may invest,
include, among others, obligations of the Government National Mortgage
Association (GNMA), the Farmers Home Administration, the Export-Import Bank and
the Small Business Administration are backed by the full faith and credit of the
United States. In the case of securities not backed by the full faith and credit
of the United States, the 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 that are not backed by
the full faith and credit of the United States include obligations such as those
issued by the Federal Home Loan Bank, the Federal Home Loan Mortgage Corporation
(FHLMC), the Federal National Mortgage Association (FNMA), the Student Loan
Marketing Association, the Resolution Funding Corporation, the Tennessee Valley
Authority, and the United States Postal Service, each of which has the right to
borrow from the U.S. Treasury to meet its obligations, and obligations of the
Farm Credit System, the obligations of which may be satisfied only by the
individual credit of the issuing agency.
MORTGAGE-RELATED SECURITIES ISSUED BY U.S. GOVERNMENT AGENCIES AND
INSTRUMENTALITIES. The Fund may invest in mortgage-backed securities, including
those which represent undivided ownership interests in pools of mortgages. The
B-2
<PAGE>
U.S. Government or the issuing agency or instrumentality guarantees the payment
of interest on and principal of these securities. However, the guarantees do not
extend to the yield or value of the securities nor do the guarantees extend to
the yield or value of the Fund's shares. 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. 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. All of these mortgages can be used to create
pass-through securities. A pass-through security is formed when mortgages are
pooled together and undivided interests in the pool or pools are sold. The cash
flow from the mortgages is passed through to the holders of the securities in
the form of periodic payments of interest, principal and prepayments (net of a
service fee). Prepayments occur when the holder of an undivided mortgage prepays
the remaining principal before the mortgage's scheduled maturity date. As a
result of the pass-through of prepayments of principal on the underlying
securities, mortgage-backed securities are often subject to more rapid
prepayment of principal than their stated maturity would indicate. The remaining
expected average life of a pool of mortgage loans underlying a mortgage-backed
security is a prediction of when the mortgage loans will be repaid and is based
upon a variety of factors, such as the demographic and geographic
characteristics of the borrowers and the mortgaged properties, the length of
time that each of the mortgage loans has been outstanding, the interest rates
payable on the mortgage loans and the current interest rate environment. 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.
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.
When mortgage obligations are prepaid, the Fund reinvests the prepaid
amounts in securities, the yields of which reflect interest rates prevailing at
that time. Therefore, 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 are reinvested in securities which have
lower yields than the prepaid mortgages. Moreover, prepayments of mortgages
which underlie securities purchased at a premium generally will result in
capital losses. For further information about mortgage-backed securities see
"Mortgage--Related Securities" and Asset-Backed Securities below.
STRIPS. The Fund may invest in component parts of U.S. Government
Securities, namely, either the corpus (principal) of such obligations or one of
the interest payments scheduled to be paid on such obligations. These
obligations may take the form of (i) obligations from which the interest coupons
have been stripped, (ii) the interest coupons that are stripped, (iii) book
entries at the Federal Reserve member bank representing ownership of obligation
components or (iv) receipts evidencing the component parts (corpus or coupons)
of U.S. Government obligations that have not actually been stripped. Such
receipts evidence ownership of component parts of U.S. Government obligations
(corpus or coupons) purchased by a third party (typically an investment banking
firm) and held on behalf of the third party in physical or book-entry form by a
major commercial bank or trust company pursuant to a custody agreement with the
third party. U.S. Government obligations, including those underlying such
receipts, are backed by the full faith and credit of the U.S. Government.
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
B-3
<PAGE>
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. Derivative mortgage-backed securities such as MBS strips are
highly sensitive to changes in prepayment and interest rates.
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 timely payment 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: (1) fixed-rate level
payment mortgage loans; (2) fixed-rate graduated payment mortgage loans;
(3) fixed-rate growing equity mortgage loans; (4) fixed-rate mortgage loans
secured by manufactured (mobile) homes; (5) mortgage loans on multifamily
residential properties under construction; (6) mortgage loans on completed
multifamily projects; (7) fixed-rate mortgage loans as to which escrowed funds
are used to reduce the borrower's monthly payments during the early years of the
mortgage loans (buydown mortgage loans); (8) mortgage loans that provide for
adjustments in payments based on periodic changes in interest rates or in other
payment terms of the mortgage loans; and (9) mortgage-backed serial notes. All
of these mortgage loans will be FHA Loans or VA Loans and, except as otherwise
specified above, will be fully-amortizing loans secured by first liens on
one-to-four-family housing units. 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. The Fund's investment
adviser may re-evaluate the Fund's investment objectives and policies if any
such legislative proposals are adopted.
GNMA GUARANTEE. GNMA is a wholly-owned corporate instrumentality of the
United States with the Department of Housing and Urban Development. The National
Housing Act of 1934, as amended (the Housing Act), authorizes GNMA to guarantee
the timely payment of the principal of and interest on certificates that are
based on and backed by a pool of mortgage loans issued by the Federal Housing
Administration (FHA) under the Housing Act, or Title V of the Housing Act of
1949 (FHA Loans) or the Farmers' Home Administration (FMHA), or guaranteed by
the Veterans' Administration (VA) under the Servicemen's Readjustment Act of
1944, as amended (VA Loans) or by pools of other eligible mortgage loans. The
Housing Act provides that the GNMA guarantee is backed by the full faith and
credit of the United States. The GNMA is also empowered to borrow without
limitation from the U.S. Treasury if necessary to make any payments required
under its guarantee.
LIFE OF GNMA CERTIFICATES. The average life of a GNMA Certificate is likely
to be substantially shorter than the original maturity of the mortgages
underlying the securities. Prepayments of principal by mortgagors and mortgage
foreclosures will usually result in the return of the greater part of principal
investment long before the maturity of the mortgages in the pool. Foreclosures
impose no risk to principal investment because of the GNMA guarantee, except to
the extent that the Fund has purchased the certificates above par in the
secondary market.
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
(FHLMC Act). 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
B-4
<PAGE>
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.
MORTGAGE-RELATED SECURITIES AND ASSET-BACKED SECURITIES
MORTGAGE-RELATED SECURITIES ARE SECURITIES THAT DIRECTLY OR INDIRECTLY
REPRESENT A PARTICIPATION IN, OR ARE SECURED BY AND PAYABLE FROM, MORTGAGE LOANS
SECURED BY REAL PROPERTY. THERE ARE CURRENTLY TWO BASIC TYPES OF MORTGAGE-
RELATED SECURITIES: (1) THOSE ISSUED OR GUARANTEED, DIRECTLY OR INDIRECTLY, BY
THE U.S. GOVERNMENT OR ONE OF ITS AGENCIES OR INSTRUMENTALITIES, (SEE, U.S.
GOVERNMENT SECURITIES ABOVE) AND (2) THOSE ISSUED OR GUARANTEED PRIVATELY.
MORTGAGE-RELATED SECURITIES THAT ARE ISSUED BY PRIVATE ISSUERS WITHOUT A
GOVERNMENT GUARANTEE USUALLY HAVE SOME FORM OF PRIVATE CREDIT ENHANCEMENT TO
ENSURE TIMELY RECEIPT OF PAYMENTS AND TO PROTECT AGAINST DEFAULT.
The Fund may invest in mortgage-related securities and other derivative
mortgage products, including those representing an undivided ownership interest
in a pool of mortgages, for example, GNMA, FNMA and FHLMC certificates, where
the U.S. Government or its agencies or instrumentalities guarantees the payment
of interest and principal of these securities. These guarantees do not extend to
the yield or value of the securities of the Fund's shares. See "U.S. Government
Securities" above.
Mortgage-related securities are subject to the risk that the principal on
the underlying mortgage loans may be prepaid at any time. Although the extent of
prepayments on a pool of mortgage loans depends on various economic and other
factors, as a general rule, prepayments on fixed rate mortgage loans will
increase during a period of falling interest rates and decrease during a period
of rising interest rates. Accordingly, amounts available for reinvestment by the
Fund are likely to be greater during a period of declining interest rates and,
as a result, likely to be reinvested at lower interest rates than during a
period of rising interest rates. Mortgage-related securities may decrease in
value as a result of increases in interest rates and may benefit less than other
fixed-income securities from declining interest rates because of the risk of
prepayment
COLLATERALIZED MORTGAGE OBLIGATIONS. A collateralized mortgage obligation
(CMO) is a security issued by a corporation or U.S. Government agency or
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.
Multiclass pass-through securities are equity interests in a trust composed of
mortgages or mortgage-backed securities. Payments of principal of and interest
on the underlying mortgage assets, and any reinvestment income thereon, provide
the funds to pay debt service on the CMOs or make scheduled distributions on the
multiclass pass-through securities. CMOs may be issued by agencies or
instrumentalities of the U.S. Government, or by private originators of, or
investors in, mortgage loans, including depository institutions, mortgage banks,
investment banks and special purpose subsidiaries of the foregoing. The issuer
of a series of CMOs may elect to be treated as a Real Estate Mortgage Investment
Conduit (REMIC). All future references to CMOs shall also be deemed to include
REMICs and Multiclass Pass-Through Securities.
In a CMO, a series of bonds or certificates is issued in multiple classes.
Each class of CMOs, often referred to as a tranche, is issued at a specific
fixed or floating coupon rate and has a stated maturity or final distribution
date. Principal prepayments on the underlying mortgage assets may cause the CMOs
to be retired substantially earlier than their stated maturities or final
distribution dates. Interest is paid or accrues on all classes of the CMOs on a
monthly, quarterly or semi-annual basis. The principal of and interest on the
underlying mortgage assets may be allocated among the several classes of a CMO
series in a number of different ways. Generally, the purpose of the allocation
of the cash flow of a CMO to the various classes is to obtain more predictable
cash flow to the individual tranches than exists with the underlying collateral
of the CMO. As a general rule, the more predictable the cash flow is on a CMO
tranche, the lower the anticipated yield will be on that tranche at the time of
issuance relative to prevailing market yields on mortgage-backed securities.
Certain issuers of CMOs, including certain CMOs that have elected to be
treated as REMICs, are not considered investment companies pursuant to a rule
adopted by the Securities and Exchange Commission (Commission), and the Fund may
invest in the securities of such issuers without the limitations imposed by the
Investment Company Act of 1940, as amended (the Investment Company Act) on
investments by the Fund in other investment companies. In addition, in reliance
on an earlier Commission 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
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other investment companies. In order to be able to rely on the Commission'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.
The underlying mortgages which collateralize the CMOs and REMICs in which
the Fund invests may have caps and floors which limit the maximum amount by
which the loan rate to the residential borrower may change up or down (1) per
reset or adjustment interval and (2) over the life of the loan. Some residential
mortgage loans restrict periodic adjustments by limiting changes in the
borrower's monthly principal and interest payments rather than limiting interest
rate changes. These payment caps may result in negative amortization.
STRIPPED MORTGAGE-BACKED SECURITIES (PRIVATELY ISSUED). In addition to MBS
strips issued by agencies or instrumentalities of the U.S. Government, the Fund
may purchase MBS strips issued by private originators of, or investors in,
mortgage loans, including depository institutions, mortgage banks, investment
banks and special purpose subsidiaries of the foregoing. Privately issued MBS
strips are subject to similar risks of MBS strips issued by agencies or
instrumentalities of the U.S. Government. See "Strips" above.
ASSET-BACKED SECURITIES. The Fund may also invest up to 20% of its total
assets in privately-issued asset-backed securities. Through the use of trusts
and special purpose subsidiaries, various types of assets, primarily home equity
loans, 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. In many instances, asset-backed securities are over-collateralized
to ensure relative stability of their credit quality. The Fund will only invest
in asset-backed securities rated at least A by S&P or Moody's or, if unrated, of
equivalent quality in the judgment of the Fund's investment adviser.
RISK FACTORS RELATING TO INVESTING IN MORTGAGE-BACKED AND ASSET-BACKED
SECURITIES. Mortgage-backed securities, including those issued or guaranteed
privately or by the U.S. Government or one of its agencies or instrumentalities,
and asset-backed securities differ from traditional debt securities. Among the
major differences are that interest and principal payments are made more
frequently, usually monthly, and principal may be prepaid at any time because
the underlying mortgage loans or other assets generally may be prepaid at any
time. As a result, if the Fund purchases such a security at a premium, a
prepayment rate that is faster than expected will reduce yield to maturity,
while a prepayment rate that is slower than expected will have the opposite
effect of increasing yield to maturity. Alternatively, if the Fund purchases
these securities at a discount, faster than expected prepayments will increase,
while slower than expected prepayments will reduce yield to maturity.
In addition, mortgage-backed securities which are secured by manufactured
(mobile) homes and multi-family residential properties, such as GNMA and FNMA
certificates, are subject to a higher risk of default than are other types of
mortgage-backed securities. See "U.S. Government Securities" above.
Although the extent of prepayments on a pool of mortgage loans depends on
various economic and other factors, as a general rule prepayments on fixed rate
mortgage loans will increase during a period of falling interest rates and
decrease during a period of rising interest rates. Accordingly, amounts
available for reinvestment by the Fund are likely to be greater during a period
of declining interest rates and, as a result, likely to be reinvested at lower
interest rates than during a period of rising interest rates. Asset-backed
securities, although less likely to experience the same prepayment rate as
mortgage-backed securities, may respond to certain of the same factors
influencing prepayments, while at other times different factors may predominate.
Mortgage-backed securities and asset-backed securities generally decrease in
value as a result of increases in interest rates and usually have less potential
for capital appreciation during periods of declining interest
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rates than other fixed-income securities with comparable maturities because of
the risk of prepayment. In addition, to the extent such mortgage securities are
purchased at a premium mortgage foreclosures and unscheduled principal
prepayments generally will result in some loss of the holders' principal to the
extent of the premium paid. On the other hand, if such mortgage securities are
purchased at a discount, an unscheduled prepayment of principal will increase
current and total returns and accelerate the recognition of income which when
distributed to shareholders will be taxable as ordinary income.
During periods of rising interest rates, the rate of prepayment of mortgages
underlying mortgage-backed securities can be expected to decline, extending the
projected average maturity of the mortgage-backed securities. The maturity
extension risk may effectively change a security which was considered short-or
intermediate-term at the time of purchase into a long-term security. Long-term
securities generally fluctuate more widely in response to changes in interest
rates than short-or intermediate-term securities.
Asset-backed securities involve certain risks that are not posed by
mortgage-backed securities, resulting mainly from the fact that asset-backed
securities do not usually contain the complete benefit of a security interest in
the related collateral. For example, credit card receivables generally are
unsecured and the debtors are entitled to the protection of a number of state
and federal consumer credit card laws, some of which may reduce the ability to
obtain full payment. In the case of automobile receivables, due to various legal
and economic factors, proceeds from repossessed collateral may not always be
sufficient to support payments on these securities.
OTHER INVESTMENTS AND POLICIES
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 "Futures Contracts on U.S. Government Securities below." The
Fund may invest in debt obligations rated at least A by Standard & Poor's
Ratings Group (S&P) or Moody's Investors Service (Moody's) or, if unrated,
deemed to be of comparable credit quality by the Fund's investment adviser.
These debt securities may have adjustable or fixed rates of interest and in
certain instances may be secured by assets of the issuer. Fixed rate debt
securities may also be subject to call provisions.
MONEY MARKET INSTRUMENTS
The Fund may, under normal circumstances, invest up to 20% of its total
assets in high-quality money market instruments, including commercial paper of
domestic companies, certificates of deposit, bankers' acceptances and other
obligations of domestic and foreign banks. Investments in money market
instruments for "coverage purposes" (as described herein) will be excluded in
calculating the 20% limitation. 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 (NRSRO) (such as Moody's or S&P) or,
if unrated, will be of equivalent quality in the judgment of the Fund's
investment adviser. Money market instruments typically have a maturity of one
year or less as measured from the date of purchase.
FOREIGN BANK OBLIGATIONS
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.
If the security is denominated in a foreign currency, it will be affected by
changes in currency exchange rates and in exchange control regulations, and
costs will be incurred in connection with conversions between currencies. A
change in the value of any such currency against the U.S. dollar will result in
a corresponding change in the U.S. dollar value of the Fund's securities
denominated in that currency. Such changes also will affect the Fund's income
and distributions to shareholders. In addition, although the Fund will receive
income in such currencies, the Fund will be required to compute
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and distribute its income in U.S. dollars. Therefore, if the exchange rate for
any such currency declines after the Fund's income has been accrued and
translated into U.S. dollars, the Fund could be required to liquidate portfolio
securities to make such distributions, particularly in instances in which the
amount of income the Fund is required to distribute is not immediately reduced
by the decline in such currency. Similarly, if an exchange rate declines between
the time the Fund incurs expenses in U.S. dollars and the time such expenses are
paid, the amount of such currency required to be converted into U.S. dollars in
order to pay such expenses in U.S. dollars will be greater than the equivalent
amount in any such currency of such expenses at the time they were incurred.
RISK FACTORS AND SPECIAL CONSIDERATIONS OF INVESTING IN FOREIGN BANK
OBLIGATIONS. Foreign securities involve certain risks, which should be
considered carefully by an investor in the Fund. These risks include political
or economic instability in the country of the issuer, the difficulty of
predicting international trade patterns, the possibility of imposition of
exchange controls and the risk of currency fluctuations. Such securities may be
subject to greater fluctuations in price than securities issued by
U.S. corporations or issued or guaranteed by the U.S. Government, its
instrumentalities or agencies. In addition, there may be less publicly available
information about a foreign issuer than about a domestic company. Foreign
issuers generally are not subject to uniform accounting, auditing and financial
reporting standards comparable to those applicable to domestic companies. There
is generally less government regulation of securities exchanges, brokers and
listed companies abroad than in the United States and there is a possibility of
expropriation, confiscatory taxation and diplomatic developments which could
affect investment.
Additional costs could be incurred in connection with the Fund's
international investment activities. Foreign brokerage commissions are generally
higher than U.S. brokerage commissions. Increased custodian costs as well as
administrative difficulties (such as the applicability of foreign laws to
foreign custodians in various circumstances) may be associated with the
maintenance of assets in foreign jurisdictions.
If a security is denominated in a foreign currency, it will be affected by
changes in currency exchange rates and in exchange control regulations, and
costs will be incurred in connection with conversions between currencies. A
change in the value of any such currency against the U.S. dollar will result in
a corresponding change in the U.S. dollar value of the Fund's securities
denominated in that currency. Such changes also will affect the Fund's income
and distributions to shareholders.
Shareholders should be aware that investing in the equity markets of
developing countries involves exposure to economies that are generally less
diverse and mature, and to political systems which can be expected to have less
stability than those of developed countries. Historical experience indicates
that the markets of developing countries have been more volatile than the
markets of developed countries. The risks associated with investments in foreign
securities, described above, may be greater with respect to investments in
developing countries.
SPECIAL CONSIDERATIONS OF INVESTING IN EURO-DENOMINATED SECURITIES. On
January 1, 1999, 11 of the 15 member states of the European Monetary Union
introduced the "euro" as a common currency. During a three-year transitional
period, the euro will coexist with each participating state's currency and, on
July 1, 2002, the euro is expected to become the sole currency of the
participating states. During the transition period, the Fund will treat the euro
as a separate currency from that of any participating state.
The conversion may adversely affect the Fund if the euro does not take
effect as planned; if a participating state withdraws from the European Monetary
Union; or if the computing, accounting and trading systems used by the Fund's
service providers, or by entities with which the Fund or its service providers
do business, are not capable of recognizing the euro as a distinct currency at
the time of, and following, euro conversion. In addition, the conversion could
cause markets to become more volatile.
The overall effect of the transition of member states' currencies to the
euro is not known at this time. It is likely that more general short- and
long-term ramifications can be expected, such as changes in the economic
environment and change in the behavior of investors, which would affect the
Fund's investments and its net asset value. In addition, although U.S. Treasury
regulations generally provide that the euro conversion will not, in itself,
cause a U.S. taxpayer to realize gain or loss, other changes that occur at the
time of the conversion, such as accrual periods, holiday conventions, indexes,
and other features may require the realization of a gain or loss by the Fund as
determined under existing tax law.
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WORLD BANK OBLIGATIONS
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.
ADJUSTABLE RATE DEBT SECURITIES
The Fund is permitted to invest in adjustable rate debt securities,
including corporate securities and 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. Adjustable rate securities
allow the Fund to participate in increases in interest rates through these
periodic adjustments. 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 of similar
maturities. In periods of rising interest rates, changes in the coupon will lag
behind changes in the market rate resulting in a lower NAV until the coupon
resets to market rates.
RISK MANAGEMENT AND RETURN ENHANCEMENT STRATEGIES
The Fund may engage in various portfolio strategies, including using
derivatives to seek and to reduce certain risks of its investments and to
enhance return. The Fund, and thus its investors, may lose money through any
unsuccessful use of these strategies. These strategies currently include the use
of options, including straddles, interest rate swaps, futures contracts,
including Eurodollar instruments, and options on futures contracts. The Fund's
ability to use these strategies may be limited by various factors, such as
market conditions, regulatory limits and tax considerations, and there can be no
assurance that any of these strategies will succeed. If new financial products
and risk management techniques are developed, the Fund may use them to the
extent consistent with its investment objective and policies.
OPTION WRITING AND RELATED RISKS. The Fund may write (that is, 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. The Fund may write and purchase put and call options
only on U.S. Government securities and financial futures contracts.
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. 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.
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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 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 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 in a segregated account cash or other liquid assets 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 in a segregated account cash or other liquid assets
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 or other liquid assets in a segregated
account.
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. See "Portfolio
Turnover" below.
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
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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 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 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.
INTEREST RATE SWAP 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, that is, 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 or
other liquid assets having an aggregate net asset value per share (NAV) 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.
If the Fund purchases an interest rate swap to hedge against a change in an
interest rate of a security the Fund anticipates buying, and such interest rate
changes unfavorably for the Fund, then the Fund may detemine not to invest in
the securities as planned and will realize a loss on the interest rate swap that
is not offset by a change in the interest rates or the price of the securities.
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.
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The Fund may enter into interest rate swaps traded on an exchange or in the
over-the-counter market. 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.
FUTURES CONTRACTS. A futures contract obligates the seller of a contract to
deliver to the purchaser of a contract cash equal to a specific dollar amount
times the difference between the value of a specific fixed-income security or
index at the close of the last trading day of the contract and the price at
which the agreement is made. As a purchaser of a futures contract, the Fund
incurs an obligation to acquire a specified amount of the obligations underlying
the futures contract at a specified time in the future for a specified price. As
a seller of a futures contract, the Fund incurs an obligation to deliver the
specified amount of the underlying obligation at a specified time in return for
an agreed upon price. The Fund may purchase futures contracts on debt
securities, aggregates of debt securities, and U.S. Government securities,
including futures contracts or options linked to the London Interbank Offered
Rate (LIBOR). Eurodollar futures contracts are currently traded on the Chicago
Mercantile Exchange. They enable purchasers to obtain a fixed rate for the
lending of funds and sellers to obtain a fixed rate for borrowings. The Fund
would use Eurodollar futures contracts and options thereon to hedge against
changes in LIBOR, to which many interest rate swaps are linked. See "Risks of
Transactions in Options and Financial Futures."
The Fund will purchase or sell futures contracts for the purpose of hedging
its portfolio (or anticipated portfolio) securities against changes in
prevailing interest rates. If the investment adviser anticipates that interest
rates may rise and, concomitantly, that the price of the Fund's portfolio
securities may fall, then the Fund may sell a futures contract. If declining
interest rates are anticipated, the Fund may purchase a futures contract to
protect against a potential increase in the price of securities the Fund intends
to purchase. Subsequently, appropriate securities may be purchased by the Fund
in an orderly fashion; as securities are purchased, corresponding futures
positions would be terminated by offsetting sales of contracts.
The Fund will purchase or sell futures contracts also to attempt to enhance
return. In addition, futures contracts will be bought or sold in order to close
out a short or long position in a corresponding futures contract.
Although most futures contracts call for actual delivery or acceptance of
securities or cash, the contracts usually are closed out before the settlement
date without the making or taking of delivery. A futures contract sale is closed
out by effecting a futures contract purchase for the same aggregate amount of
the specific type of security and the same delivery date. If the sale price
exceeds the offsetting purchase price, the seller would be paid the difference
and would realize a gain. If the offsetting purchase price exceeds the sale
price, the seller would pay the difference and would realize a loss. Similarly,
a futures contract purchase is closed out by effecting a futures contract sale
for the same aggregate amount of the specific type of security (or currency) and
the same delivery date. If the offsetting sale price exceeds the purchase price,
the purchaser would realize a gain, whereas if the purchase price exceeds the
offsetting sale price, the purchaser would realize a loss. There is no assurance
that the Fund will be able to enter into a closing transaction.
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 in a segregated account 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 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
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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. See "Risks of Hedging and Return Enhancement
Strategies" below.
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.
OPTIONS ON FUTURES CONTRACTS. An option on a futures contract gives the
purchaser the right, but not the obligation, 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. 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 may only write covered call or put options. 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 or other liquid assets in a segregated
account. The Fund is considered covered with respect to a put option it writes
on a futures contract if it (a) segregates and maintains in a segregated account
cash or other liquid assets 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 or other liquid assets in a segregated account. 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.
RISKS OF HEDGING AND RETURN ENHANCEMENT STRATEGIES. Participation in the
options or futures markets involves investment risks and transaction costs to
which the Fund would not be subject absent the use of these strategies. The
Fund, and thus its investors, may lose money through the unsuccessful use of
these strategies. If the investment adviser's predictions of movements in the
direction of the securities, foreign currency and interest rate markets are
inaccurate, the adverse consequences to the Fund may leave the Fund in a worse
position than if such strategies were not used. Risks inherent in the use of
options, futures contracts and options on futures contracts include
(1) dependence on the investment adviser's ability to predict correctly
movements in the direction of interest rates, securities prices and currency
markets; (2) imperfect correlation between the price of options and futures
contracts and options thereon and movements in the prices of the securities or
currencies being hedged; (3) the fact that skills needed to use these strategies
are different from those needed to select portfolio securities; (4) the possible
absence of a liquid secondary market for any particular instrument at any time;
and (5) the possible inability of the Fund to purchase or sell a portfolio
security at a time that otherwise would be favorable for it to do so, or the
possible need for the Fund to sell a portfolio security at a disadvantageous
time, due to the need for the Fund to maintain cover or to segregate securities
in connection with hedging transactions.
There may exist an imperfect correlation between the price movements of
futures contracts purchased by the Fund and the movements in the prices of the
securities (or currencies) which are the subject of the hedge. If participants
in the futures market elect to close out their contracts through offsetting
transactions rather than meet margin deposit requirements, distortions in the
normal relationships between the debt securities (or currencies) and futures
market could result. Price distortions could also result if investors in futures
contracts elect to make or take delivery of underlying securities (or
currencies) rather than engage in closing transactions due to the resultant
reduction in the liquidity of the futures market. In addition, due to the fact
that, from the point of view of speculators, the deposit requirements in the
futures markets are less onerous than margin requirements in the cash market,
increased participation by speculators in the futures markets could cause
temporary price distortions. Due to the possibility of price distortions in the
futures market and because of the imperfect correlation between movements in the
prices of securities (or currencies) and movements in the prices of futures
contracts, a correct forecast of interest rate trends by the investment adviser
may still not result in a successful hedging transaction.
The risk of imperfect correlation increases as the composition of the Fund's
securities portfolio diverges from the securities that are the subject of the
futures contract, for example, those included in the municipal index. Because
the change in price of the futures contract may be more or less than the change
in prices of the underlying securities, even a correct forecast of interest rate
changes may not result in a successful hedging transaction.
The Fund may sell a futures contract to protect against the decline in the
value of securities held by the Fund. However, it is possible that the futures
market may advance and the value of securities held in the Fund's portfolio may
decline. If this were to occur, the Fund would lose money on the futures
contracts and also experience a decline in value in its portfolio securities.
If the Fund purchases a futures contract to hedge against the increase in
value of securities it intends to buy, and the value of such securities
decreases, then the Fund may determine not to invest in the securities as
planned and will realize a loss on the futures contract that is not offset by a
reduction in the price of the securities.
There is a risk that the prices of securities subject to futures contracts
(and thereby the futures contract prices) may correlate imperfectly with the
behavior of the cash prices of the Fund's portfolio securities. Another such
risk is that prices of futures contracts may not move in tandem with the changes
in prevailing interest rates against which the Fund seeks a hedge. A correlation
may also be distorted by the fact that the futures market is dominated by
short-term traders seeking to profit from the difference between a contract or
security price objective and their cost of borrowed funds. Such distortions are
generally minor and would diminish as the contract approached maturity.
Pursuant to the requirements of the Commodity Exchange Act, as amended (the
Commodity Exchange Act), all futures contracts and options thereon must be
traded on an exchange. The Fund intends to purchase and sell futures contracts
only on exchanges where there appears to be a market in such futures
sufficiently active to accommodate the
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volume of its trading activity. The Fund's ability to establish and close out
positions in futures contracts and options on futures contracts would be
impacted by the liquidity of these exchanges. Although the Fund generally would
purchase or sell only those futures contracts and options thereon for which
there appeared to be a liquid market, there is no assurance that a liquid market
on an exchange will exist for any particular futures contract or option at any
particular time. In the event no liquid market exists for a particular futures
contract or option thereon in which the Fund maintains a position, it would not
be possible to effect a closing transaction in that contract or to do so at a
satisfactory price and the Fund would have to either make or take delivery under
the futures contract or, in the case of a written call option, wait to sell the
underlying securities until the option expired or was exercised, or, in the case
of a purchased option, exercise the option and comply with the margin
requirements for the underlying futures contract to realize any profit. In the
case of a futures contract or an option on a futures contract which the Fund had
written and which the Fund was unable to close, the Fund would be required to
maintain margin deposits on the futures contract or option and to make variation
margin payments until the contract was closed. In the event futures contracts
have been sold to hedge portfolio securities, such securities will not be sold
until the offsetting futures contracts can be executed. Similarly, in the event
futures have been bought to hedge anticipated securities purchases such
purchases will not be executed until the offsetting futures contracts can be
sold.
Exchanges on which futures and related options trade may impose limits on
the positions that the Fund may take in certain circumstances. In addition, the
hours of trading of financial futures contracts and options thereon may not
conform to the hours during which the Fund may trade the underlying securities.
To the extent the futures markets close before the securities markets,
significant price and rate movements can take place in the securities markets
that cannot be reflected in the futures markets.
Under regulations of the Commodity Exchange Act, investment companies
registered under the Investment Company Act are exempt from the definition of
commodity pool operator, subject to compliance with certain conditions. The Fund
may enter into futures or related options contracts for return enhancement
purposes if the aggregate initial margin and option premiums do not exceed 5% of
the liquidation value of the Fund's total assets, after taking into account
unrealized profits and unrealized losses on any such contracts, provided,
however, that in the case of an option that is in-the-money, the in-the-money
amount may be excluded in computing such 5%. The above restriction does not
apply to the purchase and sale of futures and related options contracts for BONA
FIDE hedging purchases within the meaning of the regulations of the CFTC.
In order to determine that the Fund is entering into transactions in futures
contracts for hedging purposes as such term is defined by the CFTC, either: (1)
a substantial majority (THAT IS, approximately 75%) of all anticipatory hedge
transactions (transactions in which the Fund does not own at the time of the
transaction, but expects to acquire, the securities underlying the relevant
futures contract) involving the purchase of futures contracts will be completed
by the purchase of securities which are the subject of the hedge, or (2) the
underlying value of all long positions in futures contracts will not exceed the
total value of (a) all short-term debt obligations held by the Fund; (b) cash
held by the Fund; (c) cash proceeds due to the Fund on investments within thirty
days; (d) the margin deposited on the contracts; and (e) any unrealized
appreciation in the value of the contracts.
If the Fund maintains a short position in a futures contract, it will cover
this position by holding, in a segregated account, cash or liquid assets equal
in value (when added to any initial or variation margin on deposit) to the
market value of the securities underlying the futures contracts. Such a position
may also be covered by owning the securities underlying the futures contract, or
by holding a call option permitting the Fund to purchase the same contract at a
price no higher than the price at which the short position was established.
In addition, the Fund holds a long position in a futures contract, it will
hold cash or liquid assets equal to the purchase price of the contract (less the
amount of initial or variation margin on deposit) in a segregated account.
Alternatively, the Fund could cover its long position by purchasing a put option
on the same futures contract with an exercise as high or higher than the price
of the contract held by the Fund.
Exchanges limit the amount by which the price of a futures contract may move
on any day. If the price moves equal the daily limit on successive days, than it
may prove impossible to liquidate a futures position until the daily limit moves
have ceased. In the event of adverse price movements, the Fund would continue to
be required to make daily cash payments of variation margin on open futures
positions. In such situations, if the Fund has insufficient cash, it may be
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disadvantageous to do so. In addition, the Fund may be required to take or make
delivery of the instruments underlying futures contracts it holds at a time when
it is disadvantageous to do so. The ability to close out options and futures
positions could also have an adverse impact on the Fund's ability to hedge
effectively its portfolio.
In the event of the bankruptcy of a broker through which the Fund engages in
transactions in futures or options thereon, the Fund could experience delays
and/or losses in liquidating open positions purchased or sold through the broker
and/or incur a loss of all or part of its margin deposits with the broker.
Transactions are entered into by the Fund only with brokers or financial
institutions deemed creditworthy by the investment adviser.
RISKS OF TRANSACTIONS IN OPTIONS AND FINANCIAL FUTURES. Compared to the
purchase or sale of futures contracts, the purchase and sale of call or put
options on futures contracts involves less potential risk to the Fund because
the maximum amount at risk is the premium paid for the options (plus transaction
costs). However, there may be circumstances when the purchase of a call or put
option on a futures contract would result in a loss to the Fund notwithstanding
that the purchase or sale of a futures contract would not result in a loss, as
in the instance where there is no movement in the prices of the futures
contracts or underlying securities (or currencies).
An option position may be closed out only on an exchange which provides a
secondary market for an option of the same series. As described above, although
the Fund generally will purchase only those options for which there appears to
be an active secondary market, there is no assurance that a liquid secondary
market on an exchange will exist for any particular option, or at any particular
time, and for some options, no secondary market on an exchange may exist. In
such event it might not be possible to effect closing transactions in particular
options with the result that the Fund would have to exercise its options in
order to realize any profit and would incur transaction costs upon the sale of
underlying securities pursuant to the exercise of put options.
Reasons for the absence of a liquid secondary market on an exchange include
the following: (1) there may be insufficient trading interest in certain
options; (2) restrictions may be imposed by an exchange on opening transactions
or closing transactions or both; (3) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options or underlying securities; (4) unusual or unforseen circumstances may
interrupt normal operations on an exchange; (5) the facilities of an exchange or
the Options Clearing Corporation may not at all times be adequate to handle
current trading volume; or (6) one or more exchanges could, for economic or
other reasons, decide to be compelled at some future date to discontinue the
trading of options (or a particular class or series of options), in which event
the secondary market on that exchange (or in that class or series of options)
would cease to exist, although outstanding options on that exchange that had
been issued by the Options Clearing Corporation as a result of trades on that
exchange could continue to be exercisable in accordance with their terms.
There is no assurance that higher than anticipated trading activity or other
unforseen events might not, at times, render certain of the facilities of the
Options Clearing Corporation inadequate, and thereby result in the institution
by an exchange of special procedures which may interfere with the timely
execution of customers' orders.
REPURCHASE AGREEMENTS
The Fund may on occasion enter into repurchase agreements, whereby the
seller of a security agrees to repurchase that security from the Fund at a
mutually agreed-upon time and price. The period of maturity is usually quite
short, possibly overnight or a few days, although it may 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 repurchase agreement. The instruments held as collateral are
valued daily, and if the value of the 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 will enter into repurchase transactions only with parties meeting
creditworthiness standards approved by the Fund's investment adviser. The Fund's
repurchase agreements will at all times be fully collateralized by U.S.
Government obligations in an amount at least equal to the resale price. 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.
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The Fund participates in a joint repurchase account with other investment
companies managed by Prudential Investments Fund Management LLC (PIFM) pursuant
to an order of the Commission. 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.
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 determined daily 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. As with any extensions of credit, there are risks of delay in recovery
and in some cases loss of rights in the collateral should the borrower of the
securities fail financially. However, these loans of portfolio securities will
only be made to firms determined to be creditworthy pursuant to procedures
approved by the Board of Directors of the Fund. The advantage of such loans is
that the Fund continues to receive payments in lieu of the interest and
dividends of the loaned securities, while at the same time earning interest
either directly from the borrower or on the collateral which will be invested in
short-term obligations. On termination of the loan, the borrower is required to
return the securities to the Fund, and any gain or loss in the market price
during the loan would inure to the Fund.
The Fund will pay reasonable finders', administrative and custodial fees in
connection with a loan of its securities or may share the interest earned on
collateral with the borrower.
WHEN-ISSUED AND DELAYED-DELIVERY SECURITIES
From time to time, in the ordinary course of business, 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
purchase price and the interest rate payable on the securities are fixed on the
transaction date. The Fund will maintain in a segregated account cash or other
liquid assets, marked-to-market daily, having a value equal to or greater than
the Fund's purchase commitments. 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 the Fund makes the commitment to
purchase securities on a when-issued or delayed-delivery basis, it will record
the transaction and thereafter reflect the value of such securities in
determining its NAV each day. 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
NAV. If the Fund chooses to dispose of the right to acquire a when-issued
security prior to this acquisition, it could, as with the disposition of any
other portfolio security, incur a gain or loss due to market fluctuations.
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 discount approximates the total amount of interest the
security will accrue and compound over the period until maturity or the
particular interest payment date at a rate of interest reflecting the market
rate of the security at the time of issuance. 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 invest 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. These investments
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benefit the issuer by mitigating its need for cash to meet debt service, but
also require a higher rate of return to attract investors who are willing to
defer receipt of cash. Because the Fund accrues income which may not be
represented by cash, the Fund may be required to sell other securities in order
to satisfy the distribution requirements applicable to the Fund. Zero coupon
bonds may be subject to greater fluctuation in value and lesser liquidity in the
event of adverse market conditions than comparably rated securities paying cash
interest at regular interest payment periods.
SHORT SALES AGAINST-THE-BOX
The Fund may, under certain circumstances, make short sales against-the-box.
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 for, without payment of any further consideration, 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.
REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLLS
Reverse repurchase agreements involve sales by the Fund of portfolio assets
concurrently with an agreement by the Fund to repurchase the same assets at a
later date at a fixed price. During the reverse repurchase agreement period, the
Fund continues to receive principal and interest payments on these securities.
The Fund may enter into dollar rolls in which the Fund sells securities to
be issued and delivered in the current month and simultaneously contracts to
repurchase substantially similar (same type and coupon) securities on a
specified future date from the same party. During the roll period, the Fund
forgoes principal and interest paid on the securities. The Fund is compensated
by the difference between the current sales price and the forward price for the
future purchase (often referred to as the drop) as well as by the interest
earned on the cash proceeds of the initial sale. A covered roll is a specific
type of dollar roll for which there is an offsetting cash position or a cash
equivalent security position which matures on or before the forward settlement
date of the dollar roll transaction. Reverse repurchase agreements and dollar
rolls (other than covered dollar rolls) are considered borrowings by the Fund
for purposes of the percentage limitations applicable to borrowings. Covered
dollar rolls, however, are not treated as borrowings or other senior securities
and will be excluded from the calculation of the Fund's borrowings and other
senior securities.
The Fund will establish a segregated account with its custodian in which it
will maintain cash or other liquid assets, equal in value to its obligations in
respect of reverse repurchase agreements and dollar rolls. Reverse repurchase
agreements and dollar rolls involve the risk that the market value of the
securities retained by the 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 or reverse repurchase
agreement 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.
ILLIQUID SECURITIES
The Fund may hold up to 15% of its net assets in illiquid securities. If the
Fund were to exceed this limit, the investment adviser would take prompt action
to reduce the Fund's holdings in illiquid securities to no more than 15% of its
net assets as required by applicable law. Illiquid securities include repurchase
agreements which have a maturity of longer than seven days, or other illiquid
securities including certain securities with legal or contractual restrictions
on resale (restricted securities) either within or outside of the United States
and securities that are illiquid by virtue of the absence of a readily available
market (either within or outside of the United States).
Historically, illiquid securities have included securities subject to
contractual or legal restrictions on resale because they have not been
registered under the Securities Act of 1933, as amended (Securities Act),
securities which are otherwise not readily marketable and repurchase agreements
having a maturity of longer than seven days. Securities which have not been
registered under the Securities Act are referred to as private placements or
restricted securities and are purchased directly from the issuer or in the
secondary market. Mutual funds do not typically hold a significant amount of
these restricted or other illiquid securities because of the potential for
delays on resale and uncertainty in valuation. Limitations on resale may have an
adverse effect on the marketability of portfolio securities and a mutual fund
might be unable to dispose of restricted or other illiquid securities promptly
or at reasonable prices and might thereby experience
B-18
<PAGE>
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, including securities eligible for resale pursuant to
Rule 144A under the Securities Act, securities with contractual restrictions and
commercial paper that have 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 (for example, 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, (a) 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 (b) it must not be "traded flat" (that is, without accrued
interest) or in default as to principal or interest. Repurchase agreements
subject to demand are deemed to have a maturity equal to the notice period.
The staff of the Commission has taken the position, which the Fund will
follow, that purchased OTC options and the assets used as "cover" for written
OTC options are illiquid securities unless the Fund and the counterparty have
provided for the Fund, at the Fund's election, to unwind the OTC option. The
exercise of such an option would ordinarily 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.
BORROWING
The Fund may borrow up to 20% of the value of its total assets (calculated
when the loan is made) for temporary, extraordinary or emergency purposes or for
the clearance of transactions. The Fund may pledge up to 20% of the value of its
total assets to secure such borrowings. If the Fund's asset coverage for
borrowings falls below 300%, the Fund will take prompt action to reduce its
borrowings as required by law. If the 300% asset coverage should decline as a
result of market fluctuations or other reasons, the Fund may be required to sell
portfolio securities to reduce the debt and restore the 300% asset coverage,
even though it may be disadvantageous from an investment standpoint to sell
securities at that time. The Fund will not purchase securities when borrowings
exceed 5% of the value of the Fund's total assets.
SEGREGATED ASSETS
When the Fund is required to segregate assets in connection with certain
hedging transactions, it will maintain cash or liquid assets in a segregated
account. "Liquid assets" means cash, U.S. Government securities, foreign
securities,
B-19
<PAGE>
equity securities, debt obligations or other liquid, unencumbered assets
marked-to-market daily. Such hedging transactions may involve when-issued and
delayed delivery securities, futures contracts, options and options on futures
contracts (unless otherwise covered). If collateralized or otherwise covered, in
accordance with Commission guidelines, these will not be deemed to be senior
securities.
SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund may invest up to 10% of its total assets in securities of other
investment companies. To the extent that the Fund does invest in securities of
other investment companies, shareholders of the Fund may be subject to duplicate
management and advisory fees. See "Investment Restrictions" below.
(d) TEMPORARY DEFENSIVE STRATEGY AND SHORT-TERM INVESTMENTS
In response to adverse market, economic or political conditions, the Fund
may temporarily invest up to 100% of the Fund's assets in high-quality money
market instruments, cash, repurchase agreements or U.S. Government Securities.
Investing heavily in these securities limits our ability to achieve our
investment objective, but can help to preserve the Fund's assets.
(e) PORTFOLIO TURNOVER
The Fund's portfolio turnover rate for the fiscal years ended February 28,
1999 and February 29, 2000 was 106% and 68%, respectively. The investment
adviser expects that, under normal circumstances, if the Fund writes a
substantial number of options, and those options are exercised, the Fund's
portfolio turnover rate may be as high as 250% or higher. The portfolio turnover
rate is generally the percentage computed by dividing the lesser of portfolio
purchases or sales (excluding all securities, including options, whose
maturities or expiration date at acquisition were one year or less) by the
monthly average value of the portfolio. High portfolio turnover (over 100%)
involves correspondingly greater brokerage commissions and other transaction
costs, which are borne directly by the Fund. In addition, high portfolio
turnover may also mean that a proportionately greater amount of distributions to
shareholders will be taxed as ordinary income rather than long-term capital
gains compared to investment companies with lower portfolio turnover. See
"Brokerage Allocation and Other Practices" and "Taxes, Dividends and
Distributions" below.
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
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.
B-20
<PAGE>
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. 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.
7. Act as underwriter except to the extent that, in connection with the
disposition of portfolio securities, it may be deemed to be an underwriter under
certain federal securities laws.
8. Make investments for the purpose of exercising control or management.
9. Invest in securities of other registered investment companies, except by
purchases in the open market involving only customary brokerage commissions and
as a result of which not more than 10% 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.
10. Invest in interests in oil, gas or other mineral exploration or
development programs.
11. Make loans, except through (i) repurchase agreements and (ii) loans of
portfolio securities (limited to 30% of the Fund's total assets).
12. 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.
13. 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.
MANAGEMENT OF THE FUND
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS
NAME, ADDRESS(1) AND AGE POSITION WITH FUND DURING PAST FIVE YEARS
- ------------------------ ------------------ ----------------------
<S> <C> <C>
Eugene C. Dorsey (72) Director Retired President, Chief Executive Officer and
Trustee of the Gannett Foundation (now Freedom
Forum); former Publisher of four Gannett
newspapers and Vice President of Gannett
Company; past Chairman of Independent Sector
(national coalition of philanthropic
organizations); former Chairman of the
American Council for the Arts; former Director
of the Advisory Board of Chase Manhattan Bank
of Rochester.
Delayne Dedrick Gold (61) Director Marketing and Management Consultant.
</TABLE>
B-21
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS
NAME, ADDRESS(1) AND AGE POSITION WITH FUND DURING PAST FIVE YEARS
- ------------------------ ------------------ ----------------------
<S> <C> <C>
*Robert F. Gunia (53) Vice President and Executive Vice President and Chief
Director Administrative Officer (since June 1999) of
Prudential Investments; Corporate Vice
President (September 1997-March 1999) of The
Prudential Insurance Company of America
(Prudential); Executive Vice President and
Treasurer (since December 1996) of Prudential
Investments Fund Management LLC (PIFM);
President (since April 1999) of Prudential
Investment Management Services LLC (PIMS);
former Senior Vice President (March 1987-May
1999) and former Chief Administrative Officer
(July 1989-September 1996) of Prudential
Securities Incorporated (Prudential
Securities); Director (January 1989-September
1996), Executive Vice President, Treasurer and
Chief Financial Officer (June 1987-December
1996) of Prudential Mutual Fund Management,
Inc. (PMF); Vice President and Director (since
May 1989) of The Asia Pacific Fund, Inc.
Thomas T. Mooney (58) Director President of the Greater Rochester Metro
Chamber of Commerce; former Rochester City
Manager; former Deputy Monroe County Executive
Trustee of Center for Governmental
Research, Inc.; Director of Blue Cross of
Rochester, Monroe County Water Authority,
Executive Service Corps of Rochester.
Stephen P. Munn (57) Director Chairman (since January 1994), Director and
President (since 1988) and Chief Executive
Officer (since 1988) of Carlisle Companies
Incorporated (manufacturer of industrial
products).
*David R. Odenath, Jr. Vice President and Officer in Charge, President, Chief Executive
(42) Director Officer and Chief Operating Officer (since
June 1999) of PIFM; Senior Vice President
(June 1999) of Prudential; Senior Vice
President (August 1993-May 1999) of
PaineWebber Group, Inc.
Richard A. Redeker (56) Director Former employee of Prudential Investments
(October 1996-December 1998); prior thereto,
President, Chief Executive Officer and
Director (October 1993-September 1996) of PMF;
Executive Vice President, Director and Member
of the Operating Committee (October
1993-September 1996) of Prudential Securities;
Director (October 1993-September 1996) of
Prudential Securities Group, Inc.; Executive
Vice President, The Prudential Investment
Corporation (January 1994-September 1996);
Director (January 1994-September 1996) of
Prudential Mutual Fund Distributors, Inc. and
Prudential Mutual Fund Services, Inc.; former
Senior Executive Vice President and Director
of Kemper Financial Services, Inc. (September
1978-September 1993).
</TABLE>
B-22
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS
NAME, ADDRESS(1) AND AGE POSITION WITH FUND DURING PAST FIVE YEARS
- ------------------------ ------------------ ----------------------
<S> <C> <C>
*John R. Strangfeld, Jr. President and Director Chief Executive Officer, Chairman, President
(45) and Director (since January 1990) of The
Prudential Investment Corporation, Executive
Vice President (since February 1998) of
Prudential Global Asset Management Group of
Prudential, and Chairman (since August 1989)
of Pricoa Capital Group; formerly various
positions to Chief Executive Officer (November
1994-December 1998) of Private Asset
Management Group of Prudential and Senior Vice
President (January 1986-August 1989) of
Prudential Capital Group, a unit of
Prudential.
Nancy H. Teeters (69) Director Economist; former Vice President and Chief
Economist (July 1984-July 1990) of
International Business Machines Corporation;
former Governor of Federal Reserve System
(1978-1984); former Director of Inland Steel
Industries (July 1991-1999).
Louis A. Weil, III (59) Director Chairman (since January 1999), President and
Chief Executive Officer (since January 1996)
and Director (since September 1991) of Central
Newspapers, Inc.; Chairman of the Board (since
January 1996), Publisher and Chief Executive
Officer (August 1991-December 1995) of Phoenix
Newspapers, Inc.; former Publisher of Time
Magazine (May 1989-March 1991); former
President, Publisher and Chief Executive
Officer of the Detroit News (February
1986-August 1989); member of the Advisory
Board, Chase Manhattan Bank-Westchester.
Grace C. Torres (40) Treasurer and Principal First Vice President (since December 1996) of
Financial and PIFM; former First Vice President (March
Accounting Officer 1993-May 1999) of Prudential Securities; First
Vice President (March 1994-September 1996) of
Prudential Mutual Fund Management, Inc.
Stephen M. Ungerman (46) Assistant Treasurer Tax Director (since March 1996) of Prudential
Investments and the Private Asset Group of The
Prudential Insurance Company of America
(Prudential); former First Vice President
(February 1993-September 1996) of Prudential
Mutual Fund Management, Inc.
Deborah A. Docs (42) Secretary Vice President (since December 1996) of PIFM;
former Vice President and Associate General
Counsel (June 1991-May 1996) of Prudential
Securities; Vice President and Associate
General Counsel (June 1991-September 1996) of
PMF.
William V. Healey (46) Assistant Secretary Vice President and Associate General Counsel
(since 1998) of Prudential; Chief Legal
Officer (since August 1998) of Prudential
Investments; Director (since June 1999) of ICI
Mutual Insurance Company; prior to August
1998, Associate General Counsel of The Dreyfus
Corporation ("Dreyfus"), a subsidiary of
Mellon Bank, N.A. ("Mellon Bank"), and an
officer and/or director of various affiliates
of Mellon Bank.
</TABLE>
- ------------------------
* "Interested" director, as defined in the Investment Company Act, by reason of
his or her affiliation with Prudential, Prudential Securities Incorporated
(Prudential Securities), or PIFM.
B-23
<PAGE>
(1) The address of the Directors and officers is c/o Prudential Investments Fund
Management LLC, Gateway Center Three, 100 Mulberry Street, Newark, New
Jersey 07102-4077.
Directors and officers of the Fund are also trustees, directors and officers
of some or all of the other investment companies distributed by Prudential
Investment Management Services LLC.
The Fund has Directors who, in addition to overseeing the actions of the
Fund's Manager, investment adviser and Distributor, decide upon matters of
general policy. The Directors also review the actions of the Fund's officers and
supervise the daily business operations of the Fund.
The Fund pays each of its Directors who is not an affiliated person of the
Manager annual compensation of $5,500, in addition to certain out-of-pocket
expenses. The amount of annual compensation paid to each Director may change as
a result of the introduction of additional funds upon which the Director may be
asked to serve.
Directors may receive their Directors' fees pursuant to a deferred fee
arrangement with the Fund. Under the terms of such 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, pursuant to a Commission exemptive order at the
daily rate of return of any Prudential mutual 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.
The Directors have adopted a retirement policy which calls for the
retirement of Directors on December 31 of the year in which they reach the age
of 75.
Pursuant to the terms of the Management Agreement with the Fund, the Manager
pays all compensation of officers and employees of the Fund as well as the fees
and expenses of all Directors of the Fund who are affiliated persons of the
Manager. The Fund pays each of its Directors who is not an affiliated person of
PIFM, the Prudential Investment Corporation (PIC) or the Subadviser annual
compensation of $5,800, in addition to certain out-of-pocket expenses. The
amount of annual compensation paid to each Director may change as a result of
the introduction of additional funds on whose Boards the Directors may be asked
to serve.
The following table sets forth the aggregate compensation paid by the Fund
for the fiscal year ended February 29, 2000 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 calendar year ended December 31, 1999.
COMPENSATION TABLE
<TABLE>
<CAPTION>
PENSION OR TOTAL 1999
RETIREMENT COMPENSATION FROM
AGGREGATE BENEFITS ACCRUED ESTIMATED ANNUAL FUND AND FUND
COMPENSATION AS PART OF FUND BENEFITS UPON COMPLEX PAID TO
NAME AND POSITION FROM FUND EXPENSES RETIREMENT DIRECTORS
- ----------------- ------------- ---------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Edward D. Beach, Director (a) $ 5,200 None N/A $142,500(43/70)*
Eugene C. Dorsey, Director** $ 5,200 None N/A $ 81,000(17/48)*
Delayne Dedrick Gold, Director $ 5,400 None N/A $144,500(43/70)*
Robert F. Gunia, Vice President and
Director (1) -- -- -- --
Thomas T. Mooney, Director** $ 5,200 None N/A $129,500(35/75)*
Stephen P. Munn, Director $ 5,200 None N/A $ 62,250(29/53)
Thomas H. O'Brien, Director (a) $ 5,200 None N/A $ 47,500(11/26)
David R. Odenath, Jr., Vice
President and Director (1) -- None -- --
Richard A. Redeker, Director $ 5,200 None N/A $ 95,000(29/53)
John R. Strangfeld, Jr., President
and Director (1) -- -- -- --
Nancy H. Teeters, Director $ 5,200 None N/A $ 97,000(25/43)*
Louis A. Weil, III, Director $ 5,400 None N/A $ 96,000(29/53)*
</TABLE>
(a) Former Director, retired on December 31, 1999.
* Indicates number of funds/portfolios in Fund Complex (including the Fund) to
which aggregate compensation relates.
B-24
<PAGE>
** Total aggregate compensation from all of the funds in the Fund Complex for
the calendar year ended December 31, 1999, includes amounts deferred at the
election of Directors. Including accrued interest, total compensation
amounted to $103,574, and $135,102 for Eugene C. Dorsey and Thomas T.
Mooney, respectively.
(1) Directors who are "interested" do not receive compensation from the Fund or
any fund in the Fund complex.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
Directors of the Fund are eligible to purchase Class Z shares of the Fund,
which are sold without either an initial sales charge or CDSC to a limited group
of investors.
As of April 14, 2000, the Directors and officers of the Fund, as a group,
owned less than 1% of the outstanding shares of the Fund.
As of April 14, 2000, the only beneficial owners, directly or indirectly of
more than 5% of any class of shares of the Fund were: Prudential Trust Company,
FBO PRU-DC Trust Accounts, Attn: John Surdy, 30 Scranton Office Park, Moosic PA
18507-1796 who held 2,044,523 Class Z shares of the Fund (or 18.6% of the
outstanding Class Z shares); and Pru Defined Contribution Services, FBO
PRU-NON-Trust Accounts, Attn: John Surdy, 30 Scranton Office Park, Moosic PA
18507-1755 who held 4,908,110 Class Z shares of the Fund (or 44.7% of the
outstanding Class Z shares).
As of April 14, 2000, Prudential Securities was the record holder for other
beneficial owners of 50,610,092 Class A shares (or 52.4% of the outstanding
Class A shares), 9,220,325 Class B shares (or 45.9% of the outstanding Class B
shares), 641,967 Class C shares (or 68.2% of the outstanding Class C shares) and
744,619 Class Z shares (or 6.5% of the outstanding Class Z 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.
INVESTMENT ADVISORY AND OTHER SERVICES
(a) MANAGER AND INVESTMENT ADVISER
The manager of the Fund is Prudential Investments Fund Management LLC (PIFM
or the Manager), Gateway Center Three, 100 Mulberry Street, Newark, New Jersey
07102-4077. The Manager 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 January 31,
2000, PIFM managed and/or administered open-end and closed-end management
investment companies with assets of approximately $74.9 billion. According to
the Investment Company Institute, as of September 30, 1999, the Prudential
mutual funds were the 20th largest family of mutual funds in the United States.
The Manager is a subsidiary of Prudential Securities and Prudential.
Prudential Mutual Fund Services LLC (PMFS or the Transfer Agent), a wholly-owned
subsidiary of the Manager, serves as the Transfer Agent and dividend
distribution agent for the Prudential mutual funds and, in addition, provides
customer service, record keeping and management and administration services to
qualified plans.
Pursuant to the Management Agreement with the Fund (the Management
Agreement), the Manager, 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, the Manager is obligated to keep certain
books and records of the Fund. The Manager has hired The Prudential Investment
Corporation, doing business as Prudential Investments (PI, the investment
adviser or the Subadviser) to provide subadvisory services to the Fund. The
Manager 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 Custodian) and the Fund's transfer and
dividend disbursing agent. The services of the Manager for the Fund are not
exclusive under the terms of the Management Agreement and the Manager is free
to, and does, render management services to others.
For its services, the Manager receives, pursuant to the Management
Agreement, a fee at an annual rate of 0.50 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
B-25
<PAGE>
the event the expenses of the Fund (including the fees of the Manager, 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 the Manager
will be reduced by the amount of such excess. Currently, the Fund believes there
are no such expense limitations.
In connection with its management of the corporate affairs of the Fund, the
Manager 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 PIFM or the
Fund's Subadviser;
(b) all expenses incurred by the Manager 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 Subadviser pursuant to the
subadvisory agreement between the Manager and the Subadviser (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 Subadviser; (c) the fees and certain expenses of the Custodian and
Transfer 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 Commission, including the preparation and printing of the
Fund's registration statements and prospectuses for such purposes and paying the
fees and expenses of notice filings made in accordance with state securities
laws; (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 the Manager 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.
For the fiscal years ended February 29, 2000, February 28, 1999 and
February 28, 1998, the Fund paid management fees to the Manager or its
predecessors of $6,136,364, $6,252,699, and $6,507,621, respectively.
The Manager has entered into the Subadvisory Agreement with the Subadviser,
a wholly-owned subsidiary of Prudential. The Subadvisory Agreement provides that
the Subadviser will furnish investment advisory services in connection with the
management of the Fund. In connection therewith, the Subadviser is obligated to
keep certain books and records of the Fund. The Manager continues to have
responsibility for all investment advisory services pursuant to the Management
Agreement and supervises the Subadviser's performance of such services. The
Subadviser was reimbursed by the Manager for the reasonable costs and expenses
incurred by the Subadviser in furnishing those services. Effective January 1,
2000, the Subadviser is paid by the Manager at an annual rate of .25 of 1% up to
and including $3 billion, and .166 of 1% of over $3 billion of the Fund's
average daily net assets. Investment advisory services are provided to the Fund
by a unit of the Subadviser, known as Prudential Mutual Fund Investment
Management.
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
B-26
<PAGE>
the Fund, the Manager or the Subadviser 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.
Prudential Investment's Fixed Income Group includes the following sector
teams which may contribute towards security selection in addition to the sector
team described in the prospectus (assets under management are as of
December 31, 1999).
CORPORATE
ASSETS UNDER MANAGEMENT: $47.3 billion.
TEAM LEADER: Steven Kellner. GENERAL INVESTMENT EXPERIENCE: 13 years.
PORTFOLIO MANAGERS: 8. AVERAGE GENERAL INVESTMENT EXPERIENCE: 13 years, which
includes team members with significant mutual fund experience.
SECTOR: U.S. investment-grade corporate securities.
INVESTMENT STRATEGY: Focus is on identifying spread, credit quality and
liquidity trends to capitalize on changing opportunities in the market.
Ultimately, they seek the highest expected return with the least risk.
GLOBAL BOND
ASSETS UNDER MANAGEMENT: $3.9 billion.
TEAM LEADERS: Steven Koomar and David Bessey. GENERAL INVESTMENT EXPERIENCE: 13
years and 10 years, respectively.
PORTFOLIO MANAGERS: 5. AVERAGE GENERAL INVESTMENT EXPERIENCE: 9 years, which
includes team members with significant mutual fund experience.
SECTOR: Corporate and government securities of foreign issuers.
INVESTMENT STRATEGY: Focus is on higher quality sovereign debt and on high-grade
and high yield foreign corporate and emerging market issues.
MONEY MARKETS
ASSETS UNDER MANAGEMENT: $36.0 billion.
TEAM LEADER: Joseph Tully. GENERAL INVESTMENT EXPERIENCE: 16 years.
PORTFOLIO MANAGERS: 9. AVERAGE GENERAL INVESTMENT EXPERIENCE: 10 years, which
includes team members with significant mutual fund experience.
SECTOR: High-quality short-term securities, including both taxable and
tax-exempt instruments.
INVESTMENT STRATEGY: Focus is on safety of principal, liquidity and controlled
risk.
CODE OF ETHICS
The Board of Directors of the Fund has adopted a Code of Ethics. In
addition, the Manager, Subadviser and Distributor have each adopted a Code of
Ethics (the "Codes"). The Codes permit personnel subject to the Codes to invest
in securities, including securities that may be purchased or held by the Fund.
However, the protective provisions of the Codes prohibit certain investments and
limit such personnel from making investments during periods when the Fund is
making such investments. The Codes are on public file with, and are available
from, the Commission.
(b) PRINCIPAL UNDERWRITER, DISTRIBUTOR AND RULE 12b-1 PLANS
Prudential Investment Management Services LLC (PIMS or the Distributor),
Gateway Center Three, 100 Mulberry Street, Newark, New Jersey 07102-4077, acts
as the distributor of the shares of the Fund. The Distributor is a subsidiary of
Prudential.
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 a distribution agreement (the
Distribution Agreement), the Distributor incurs the expenses of distributing the
Fund's Class A, Class B and Class C
B-27
<PAGE>
shares. The Distributor also incurs the expenses of distributing the Fund's
Class Z shares under the Distribution Agreement, none of which are reimbursed by
or paid for by the Fund. See "How the Fund is Managed--Distributor" in the
Prospectus.
The expenses incurred under the Plans include commissions and account
servicing fees paid to or on account of brokers or financial institutions 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 the Distributor associated with the sale of Fund shares,
including lease, utility communications and sales promotion expenses.
Under the Plans, the Fund is obligated to pay distribution and/or service
fees to the Distributor as compensation for its distribution and services
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.
The distribution and/or service fees may also be used by the Distributor to
compensate on a continuing basis brokers in consideration for the distribution,
marketing, administrative and other services and activities provided by brokers
with respect to the promotion of the sale of the Fund's shares and the
maintenance of related shareholder accounts.
CLASS A PLAN. Under the Class A Plan, the Fund may pay the Distributor 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 (1) 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 (2) total distribution
fees (including the service fee of .25 of 1%) may not exceed .30 of 1%. The
Distributor has contractually agreed to limit its distribution-related fees
payable under the Class A Plan to .25 of 1% of the average daily net assets of
the Class A shares for the fiscal year ending February 28, 2001. Fee waivers
will increase the Fund's total return.
For the fiscal year ended February 29, 2000, the Distributor received
payments of $2,143,964 under the Class A Plan. The amount was primarily expended
for payment of account servicing fees to financial advisers and other persons
who sell Class A shares. The Distributor also received approximately $126,500 in
initial sales charges attributable to Class A shares.
CLASS B AND CLASS C PLANS. Under the Class B and Class C Plans, the Fund
pays the Distributor 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 each of the Class B and Class C shares. The Class B Plan provides
that (1) up to .25% of 1% of the average daily net assets of the Class B shares
may be paid as a service fee and (2) up to 1% (not including the service fee) 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 assets and .50 of 1% of such assets in excess of
$4 billion (asset-based sales charge), may be paid for distribution-related
expenses with respect to the Class B shares. The Class C Plan provides that (1)
up to .25 of 1% of the average daily net assets of the Class C shares may be
paid as a service fee for providing personal service and/or maintaining
shareholder accounts and (2) up to .75 of 1% of the average daily net assets of
the Class C shares (asset-based sales charge) may be paid for
distribution-related expenses with respect to Class C shares. The service fee
(.25 of 1% of average daily net assets) is used to pay for personal service
and/or the maintenance of shareholder accounts. The Distributor also receives
contingent deferred sales charges from certain redeeming shareholders and, with
respect to Class C shares, initial sales charges. The Distributor has
contractually agreed to limit its distribution-related fees payable under the
Class B and Class C plans to .825 of 1% and .75 of 1%, of the average daily net
assets of the Class B and Class C shares, respectively, for the fiscal year
ending February 28, 2001. Fee waivers will increase the Fund's total return.
CLASS B PLAN. For the fiscal year ended February 29, 2000, the Distributor
received $2,168,616 from the Fund under the Class B Plan and collectively spent
approximately $1,514,900 in distributing the Class B shares of the Fund. It is
estimated that of the latter amount, approximately .1% ($700) was spent on
printing and mailing of prospectuses to other than current shareholders, 22.0%
($333,700) 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 77.9% ($1,180,500) on the aggregate of (i) payment of commissions and
account servicing fees to financial advisers (50.4% or $763,700), and (ii) an
allocation on account of overhead and other branch office distribution-related
expenses (27.5% or $416,800). The term "overhead and other branch office
distribution-related expenses" represents (a) the expenses of operating branch
B-28
<PAGE>
offices of Prusec and the Distributor 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.
The Distributor also receives the proceeds of contingent deferred sales
charges paid by holders of Class B shares upon certain redemptions of Class B
shares. See "How to Buy, Sell and Exchange Shares of the Fund--How to Sell Your
Shares--Contingent Deferred Sales Charge (CDSC)" in the Prospectus. For the
fiscal year ended February 29, 2000, the Distributor received approximately
$559,000 in contingent deferred sales charges attributable to the Class B
shares.
CLASS C PLAN. For the fiscal year ended February 29, 2000, the Distributor
received $67,605 from the Fund under the Class C Plan and spent approximately
$85,300 in distributing the Fund's Class C shares. It is estimated that of the
latter amount approximately 0% ($0) was spent on printing and mailing of
prospectuses to other than current shareholders; 11.3% ($9,700) on compensation
to Pruco Securities Corporation, an affiliated broker-dealer, for commissions to
its representatives and other expenses, including an allocation of overhead and
other branch office distribution-related expenses, incurred by it for
distribution of Fund shares; and 88.7% ($75,600) on the aggregate of
(i) payments of commission and account servicing fees to financial advisors
(61.8% or $52,700) and (ii) an allocation of overhead and other branch office
distribution-related expenses (26.9% or $22,900). The term "overhead and other
branch office distribution-related expenses" represents (a) the expenses of
operating Prudential Securities' branch offices in connection with the sale of
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.
The Distributor also receives an initial sales charge and the proceeds of
contingent deferred sales charges paid by holders of Class C shares upon certain
redemptions of Class C shares. For the fiscal year ended February 29, 2000, the
Distributor received approximately $12,900 in contingent deferred sales charges
attributable to Class C shares. For the fiscal year ended February 29, 2000, the
Distributor also received approximately $41,500 in initial sales charges with
respect to Class C shares.
Distribution expenses attributable to the sale of Class A, Class B and
Class C shares of the Fund are allocated to each such class based upon the ratio
of sales of each such class to the sales of Class A, Class B and Class C 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.
The 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 directors who are not interested persons of the
Fund and have no direct or indirect financial interest in the Class A, B or C
Plans or in any agreement related to the Plans (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 the Distribution Agreement, the Fund has agreed to indemnify the
Distributor to the extent permitted by applicable law against certain
liabilities under federal securities law.
B-29
<PAGE>
FEE WAIVERS/SUBSIDIES
PIFM may from time to time waive all or a portion of its management fee and
subsidize all or a portion of the operating expenses of the Fund. In addition,
the Distributor has contractually agreed to waive a portion of its distribution
fees for Class A, B, and C shares as described above. Fee waivers and subsidies
will increase the Fund's total return.
NASD MAXIMUM SALES CHARGE RULE
Pursuant to rules of the NASD, the Distributor is required to limit
aggregate initial sales charges, deferred sales charges and asset-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 reimbursement of
dividends and distributions are not included in the calculation of the 6.25%
limitation. The annual asset-based sales charge on shares of the Fund may not
exceed .75 of 1% per class. The 6.25% limitation applies to each class of the
Fund rather than on a per shareholder basis. If aggregate sales charges were to
exceed 6.25% of total gross sales of any class, all sales charges on shares of
that class would be suspended.
(c) OTHER SERVICE PROVIDERS
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, serves as Custodian for the Fund's portfolio securities and
cash and, in that capacity, maintains certain financial and accounting books and
records pursuant to an agreement with the Fund. Subcustodians provide custodial
services for the Fund's foreign assets held outside the United States.
Prudential Mutual Fund Services LLC (PMFS), 194 Wood Avenue South, Iselin,
New Jersey 08830, serves as the transfer and dividend disbursing agent of the
Fund. PMFS is a wholly-owned subsidiary of PIFM. PMFS provides customary
transfer agency services to the Fund, including the handling of shareholder
communications, the processing of shareholder transactions, the maintenance of
shareholder account records, the payment of dividends and distributions and
related functions. For these services, PMFS receives an annual fee of $10.00 per
shareholder account and a new account set-up fee of $2.00 for each manually
established shareholder account. PMFS is also reimbursed for its out-of-pocket
expenses, including but not limited to postage, stationery, printing, allocable
communication expenses and other costs.
For the fiscal year ended February 29, 2000, the Fund incurred expenses of
approximately $2,024,000 for the services of PMFS.
PricewaterhouseCoopers LLP, 1177 Avenue of the Americas, New York, New York
10036, serves as the Fund's independent accountants and in that capacity audits
the Fund's annual financial statements.
BROKERAGE ALLOCATION AND OTHER PRACTICES
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.
B-30
<PAGE>
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 Act), except in accordance with rules of the Commission. 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 best possible
combination of 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.
For the fiscal years ended February 29, 2000, February 28, 1999 and
February 28, 1998, the Fund paid no brokerage commissions to Prudential
Securities.
The Fund is required to disclose its holdings of securities of its regular
brokers and dealers (as defined under Rule 10b-1 of the Investment Company Act)
and their parents at February 29, 2000. As of February 29, 2000, the Fund did
not hold debt securities of any of its regular brokers and dealers.
B-31
<PAGE>
CAPITAL SHARES, OTHER SECURITIES AND ORGANIZATION
The Fund is authorized to issue 2 billion shares of common stock, $.01 par
value per share, divided into four classes, designated Class A, Class B,
Class C and Class Z common stock. Of the authorized shares of common stock of
the Fund, 500 million shares consist of Class A common stock, 500 million shares
consist of Class B common stock, 500 million shares consist of Class C common
stock and 500 million shares consist of Class Z common stock. Each class of
common stock of the Fund represents an interest in the same assets of the Fund
and is identical in all respects except that (1) each class is subject to
different sales charges and distribution and/or service fees (except Class Z
shares, which are not subject to any sales charges and distribution and/or
service fees), which may affect performance, (2) each class has exclusive voting
rights on any matter submitted to shareholders that relates solely to its
distribution arrangement and has separate voting rights on any matter submitted
to shareholders in which the interests of one class differ from the interests of
any other class, (3) each class has a different exchange privilege, and
(4) only Class B shares have a conversion feature. Class Z shares are offered
exclusively for sale to a limited group of investors. In accordance with the
Fund's Articles of Incorporation, the Board of Directors may authorize the
creation of additional series of common stock and classes within such series,
with such preferences, privileges, limitations and voting and dividend rights as
the Board may determine.
The Board of Directors may increase or decrease the number of authorized
shares without the approval of shareholders. Shares of the Fund, when issued,
are fully paid, nonassessable, fully transferable and redeemable at the option
of the holder. Shares are also redeemable at the option of the Fund under
certain circumstances. 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 (with the exception
of Class Z shares, which are not subject to any distribution and/or service
fees). 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 debts 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 and to Class Z
shareholders, whose shares are not subject to any distribution and/or service
fees. 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% or more
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.
PURCHASE, REDEMPTION AND PRICING OF FUND SHARES
Shares of the Fund may be purchased at a price equal to the next determined
net asset value (NAV) per share plus a sales charge which, at the election of
the investor, may be imposed either (1) at the time of purchase (Class A shares
or Class C shares), or (2) on a deferred basis (Class B or Class C shares).
Class Z shares of the Fund are offered to a limited group of investors at net
asset value without any sales charges. See "How to Buy, Sell and Exchange Shares
of the Fund--How to Buy Shares" in the Prospectus.
Each class represents an interest in the same assets of the Fund and is
identical in all respects except that (1) each class is subject to different
sales charges and distribution and/or service fees (except for Class Z shares
which are not subject to any sales charge or distribution and/or service fees)
which may affect performance, (2) each class has exclusive voting rights with
respect to any matter submitted to shareholders that relates solely to its
arrangement and has separate voting rights on any matter submitted to
shareholders in which the interests of one class differ from the interests of
any other class, (3) each class has a different exchange privilege, (4) only
Class B shares have a conversion feature and (5) Class Z shares are offered
exclusively for sale to a limited group of investors. See "Investment Advisory
and Other Services--Principal Underwriter, Distributor and Rule 12b-1 Plans"
above and "Shareholder Investment Account--Exchange Privilege" below.
PURCHASE BY WIRE. For an initial purchase of shares of the Fund by wire, you
must complete an application and telephone PMFS at (800) 225-1852 (toll-free) to
receive an account number. The following information will be requested:
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<PAGE>
your name, address, tax identification number, fund and class election, dividend
distribution election, amount being wired and wiring bank. Instructions should
then be given by you to your bank to transfer funds by wire to State Street Bank
and Trust Company (State Street), Boston, Massachusetts, Custody and Shareholder
Services Division, Attention: Prudential Government Income Fund, specifying on
the wire the account number assigned by PMFS and your name and identifying the
class in which you are investing (Class A, Class B, Class C or Class Z shares).
If you arrange for receipt by State Street of federal funds prior to the
calculation of NAV (4:15 p.m., New York time), on a business day, you may
purchase shares of the Fund as of that day.
In making a subsequent purchase order by wire, you should wire State Street
directly and should be sure that the wire specifies Prudential Government Income
Fund, Class A, Class B, Class C or Class Z shares and your name and individual
account number. It is not necessary to call PMFS to make subsequent purchase
orders using federal funds. The minimum amount which may be invested by wire is
$1,000.
ISSUANCE OF FUND SHARES FOR SECURITIES
Transactions involving the issuance of Fund shares for securities (rather
than cash) will be limited to (1) reorganizations, (2) statutory mergers, or
(3) other acquisitions of portfolio securities that: (a) meet the investment
objectives and policies of the Fund, (b) are liquid and not subject to
restrictions on resale, (c) have a value that is readily ascertainable via
listing on or trading in a recognized United States or international exchange or
market, and (d) are approved by the Fund's investment adviser.
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%, Class C*
shares are sold with a 1% sales charge, and Class B* and Class Z shares are sold
at NAV. Using the Fund's NAV at February 29, 2000, 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.... $8.41
Maximum sales charge (4% of offering price)............... .35
-----
Offering price to public.................................. $8.76
=====
CLASS B
Net asset value, offering price and redemption price per
Class B share*.......................................... $8.41
=====
CLASS C
Net asset value and redemption price per Class C share*... $8.41
Sales Charge (1% of offering price)....................... .08
-----
Offering price to public.................................. $8.49
=====
CLASS Z
Net asset value, offering price and redemption price per
Class Z share........................................... $8.40
=====
</TABLE>
- ------------------------
* Class B and Class C shares are subject to a contingent deferred sales charge
on certain redemptions. See "How to Buy, Sell and Exchange Shares of the
Fund--How to Sell Your Shares" in the Prospectus.
SELECTING A PURCHASE ALTERNATIVE
If you intend to hold your investment in the Fund for less than 4 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 investments for more than 4 years, but less than
5 years, you may consider purchasing Class A shares or Class C shares
because: (i) the maximum 4% initial sales charge plus the cumulative annual
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<PAGE>
distribution-related fee on Class A shares; and (ii) the maximum 1% initial
sales charge plus the cumulative annual distribution-related fee on Class C
shares would be lower than the contingent-deferred sales charge plus the
cumulative annual distribution-related fee on Class B shares.
If you intend to hold your investment for longer than 5 years, you should
consider purchasing Class A shares over either Class B or Class C shares. This
is because the maximum sales charge plus the cumulative annual distribution-
related fee on Class A shares would be less than those of the Class B and
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 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 of Class A shares and you
purchase Class B or Class C shares, you would have to hold your investment for
more than 5 years for the higher cumulative annual distribution-related fee on
those shares plus, in the case of Class C shares, the 1% initial sales charge 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 NAV, the effect of
the return on the investment over this period of time or redemptions when the
CDSC is applicable.
REDUCTION AND WAIVER OF INITIAL SALES CHARGE--CLASS A SHARES
BENEFIT PLANS. Certain group retirement and savings plans may purchase
Class A shares without the initial sales charge, if they meet the required
minimum for amount of assets, average account balance or number of eligible
employees. For more information about these requirements, call Prudential at
(800) 353-2847.
OTHER WAIVERS. In addition, Class A shares may be purchased at NAV, through
the Distributor or the Transfer Agent, by:
- officers of the Prudential mutual funds (including the Fund)
- employees of the Distributor, Prudential Securities, PIFM and their
subsidiaries and members of the families of such persons who maintain an
"employee related" account at Prudential Securities or the Transfer Agent
- employees of subadvisers of the Prudential mutual funds provided that
purchases at NAV are permitted by such person's employer
- Prudential, 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
- members of the Board of Directors of Prudential
- real estate brokers, agents and employees of real estate brokerage
companies affiliated with The Prudential Real Estate Affiliates who
maintain an account at Prudential Securities, Prusec or with the Transfer
Agent
- registered representatives and employees of brokers who have entered into
a selected dealer agreement with the Distributor provided that purchases
at NAV are permitted by such person's employer
- investors who have a business relationship with a financial adviser who
joined Prudential Securities from another investment firm, provided that
(1) the purchase is made within 180 days of the commencement of the
financial adviser's employment at Prudential Securities, or within one
year in the case of Benefit Plans, (2) 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 (3) the
financial adviser served as the client's broker on the previous purchase
- investors in Individual Retirement Accounts, provided the purchase is made
with the proceeds of a tax-free rollover of assets from a Benefit Plan for
which Prudential provides administrative or recordkeeping services and
further provided that such purchase is made within 60 days of receipt of
the Benefit Plan distribution
B-34
<PAGE>
- orders placed by broker-dealers, investment advisers or financial planners
who have entered into an agreement with the Distributor, who place trades
for their own accounts for the accounts of their clients and who charge a
management consulting or other fee for their services (for example, mutual
fund "wrap" or asset allocation programs)
- orders placed by clients of broker-dealers, investment advisers or
financial planners who place trades for customer accounts if the accounts
are linked to the master account of such broker-dealer, investment adviser
or financial planner and the broker-dealer, investment adviser or
financial planner charges its clients a separate fee for its services (for
example, mutual fund "supermarket programs").
Broker-dealers, investment advisers or financial planners sponsoring
fee-based programs (such as mutual fund "wrap" or asset allocation programs and
mutual fund "supermarket" programs) may offer their clients more than one class
of shares in the Fund in connection with different pricing options for their
programs. Investors should consider carefully any separate transaction and other
fees charged by these programs in connection with investing in each available
share class before selecting a share class.
For an investor to obtain any reduction or waiver of the initial sales
charges, at the time of the sale either the Transfer Agent must be notified
directly by the investor or the Distributor must be notified by the broker
facilitating the transaction that the sale qualifies for the reduced or waived
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.
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 "How to Buy, Sell and Exchange Shares of the Fund--How to
Buy Shares--Step 2: Choose a Share Class--Reducing or Waiving Class A's Initial
Sales Charge" in the Prospectus.
An eligible group of related Fund investors includes any combination of the
following:
- an individual
- the individual's spouse, their children and their parents
- the individual's and spouse's Individual Retirement Account (IRA)
- 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)
- a trust created by the individual, the beneficiaries of which are the
individual, his or her spouse, parents or children
- a Uniform Gifts to Minors Act/Uniform Transfers to Minors Act account
created by the individual or the individual's spouse
- one or more employee benefit plans of a company controlled by an
individual.
In addition, an eligible group of related Fund investors may include an
employer (or group of related employers) and one or more qualified retirement
plans of such employer or employers (an employer controlling, controlled by or
under common control with another employer is deemed related to that employer).
The Transfer Agent, Distributor or your broker 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.
LETTERS OF INTENT. Reduced sales charges are also available to investors (or
an eligible group of related investors), who enter into a written Letter of
Intent providing for the purchase, within a thirteen-month period, of shares of
the Fund and shares of other Prudential mutual funds (Letter of Intent).
Retirement and group plans no longer qualify to purchase Class A shares at NAV
by entering into a Letter of Intent.
B-35
<PAGE>
For purposes of the Letter of Intent, 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 or its
affiliates, and through your broker, will not be aggregated to determine the
reduced sales charge.
A Letter of Intent permits an investor 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 investor.
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
investor's cost, can be applied to the fulfillment of the Letter of Intent goal.
The Letter of Intent does not obligate the investor to purchase, nor the
Fund to sell, the indicated amount. In the event the Letter of Intent goal is
not achieved within the thirteen-month period, the investor 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.
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.
CLASS B SHARES
The offering price of Class B shares for investors choosing one of the
deferred sales charge alternatives is the NAV next determined following receipt
of an order in proper form by the Transfer Agent, your broker or the Distributor
plus in the case of Class C shares, an initial sales charge of 1%. Redemptions
of Class B shares may be subject to a CDSC. See "Contingent Deferred Sales
Charge" below. In connection with these waivers, the Transfer Agent will require
you to submit the supporting documentation set forth below.
The Distributor will pay, from its own resources, sales commissions of up to
5% of the purchase price of Class B shares to brokers, financial advisers and
other persons who sell Class B shares at the time of sale. This facilitates the
ability of the Fund to sell the Class B shares without an initial sales charge
being deducted at the time of purchase. The Distributor anticipates that it will
recoup its advancement of sales commissions from the combination of the CDSC and
the distribution fee.
CLASS C SHARES
The offering price of Class C shares is the next determined NAV plus a 1%
sales charge. In connection with the sale of Class C shares, the Distributor
will pay, from its own resources, brokers, financial advisers and other persons
which distribute Class C shares a sales commission of up to 2% of the purchase
price at the time of the sale.
WAIVER OF INITIAL SALES CHARGE--CLASS C SHARES
BENEFIT PLANS. Certain group retirement plans may purchase Class C shares
without the initial sales charge. For more information, call Prudential at (800)
353-2847.
INVESTMENTS OF REDEMPTION PROCEEDS FROM OTHER INVESTMENT
COMPANIES. Investors may purchase Class C shares at NAV, without the initial
sales charge, with the proceeds from the redemption of shares of any
unaffiliated registered investment company which were not held through an
account with any Prudential affiliate. Such purchases must be made within 60
days of the redemption. Investors eligible for this waiver include: (i)
investors purchasing shares through an account at Prudential Securities; (ii)
investors purchasing shares through an ADVANTAGE Account or an Investor Account
with Pruco Securities Corporation (Prusec); and (iii) investors purchasing
shares through other brokers. This waiver is not available to investors who
purchase shares directly from the Transfer Agent. You must notify the Transfer
Agent directly or through your broker if you are entitled to this waiver and
provide the Transfer Agent with such supporting documents as it may deem
appropriate.
B-36
<PAGE>
CLASS Z SHARES
BENEFIT PLANS. Certain group retirement plans may purchase Class Z shares if
they meet the required minimum for amount of assets, average account balance or
number of eligible employees. For more information about these requirements,
call Prudential at (800) 353-2847.
MUTUAL FUND PROGRAMS. Class Z shares also can be purchased by participants
in any fee-based program or trust program sponsored by Prudential or an
affiliate that includes mutual funds as investment options and the Fund as an
available option. Class Z shares also can be purchased by investors in certain
programs sponsored by broker-dealers, investment advisers and financial planners
who have agreements with Prudential Investments Advisory Group relating to:
- Mutual fund "wrap" or asset allocation programs, where the sponsor places
Fund trades, links its clients' accounts to a master account in the
sponsor's name and charges its clients a management, consulting or other
fee for its services
- Mutual fund "supermarket" programs, where the sponsor links its clients'
accounts to a master account in the sponsor's name and the sponsor charges
a fee for its services.
Broker-dealers, investment advisers or financial planners sponsoring these
mutual fund programs may offer their clients more than one class of shares in
the Fund in connection with different pricing options for their programs.
Investors should consider carefully any separate transaction and other fees
charged by these programs in connection with investing in each available share
class before selecting a share class.
OTHER TYPES OF INVESTORS. Class Z shares also are available for purchase by
the following categories of investors:
- Certain participants in the MEDLEY Program (group variable annuity
contracts) sponsored by Prudential for whom Class Z shares of the
Prudential mutual funds are an available investment option
- Current and former Directors/Trustees of the Prudential mutual funds
(including the Fund)
- Prudential, with an investment of $10 million or more.
In connection with the sale of Class Z shares, the Manager, the Distributor
or one of their affiliates may pay dealers, financial advisers and other persons
which distribute shares a finders' fee from its own resources based on a
percentage of the net asset value of shares sold by such persons.
PRUARRAY ASSOCIATION BENEFIT PLANS. Class Z shares are also offered to
Benefit Plans or non-qualified plans sponsored by employers which are members of
a common trade, professional or membership association (Association) that
participate in a PruArray Plan, provided that the Association enters into a
written agreement with Prudential. Such Benefit Plans or non-qualified plans may
purchase Class Z shares without regard to the assets or number of participants
in the individual employer's qualified plans or non-qualified plans so long as
the employers in the Association have retirement plan assets in the aggregate of
at least $250 million for which Prudential Retirement Services provides
participant-level recordkeeping services.
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 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. Rights of Accumulation may be applied across the classes
of the Prudential mutual funds. However, the value of shares held directly with
the Transfer Agent and through your broker will not be aggregated to determine
the reduced sales charge. The value of existing holdings for purposes of
determining the reduced sales charge is calculated using the maximum offering
price (net asset value plus maximum sales charge) as of the previous business
day.
The Distributor or the Transfer Agent must be notified at the time of
purchase that the shareholder 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.
SALE OF SHARES
You can redeem your shares at any time for cash at the NAV next determined
after the redemption request is received in proper form (in accordance with
procedures established by the Transfer Agent in connection with investors'
accounts)
B-37
<PAGE>
by the Transfer Agent, the Distributor or your broker. In certain cases,
however, redemption proceeds will be reduced by the amount of any applicable
CDSC, as described below. See "Contingent Deferred Sales Charge" below. If you
are redeeming your shares through a broker, your broker must receive your sell
order before the Fund computes its NAV for that day (that is, 4:15 p.m., New
York time) in order to receive that day's NAV. Your broker will be responsible
for furnishing all necessary documentation to the Distributor and may charge you
for its services in connection with redeeming shares of the Fund.
If you hold shares of the Fund through Prudential Securities, you must
redeem your shares through Prudential Securities. Please contact your Prudential
Securities financial adviser.
In order to redeem shares, a written request for redemption signed by you
exactly as the account is registered is required. If you hold certificates, the
certificates must be received by the Transfer Agent, the Distributor or your
broker in order for the redemption request to be processed. If redemption is
requested by a corporation, partnership, trust or fiduciary, written evidence of
authority acceptable to the Transfer Agent must be submitted before such request
will be accepted. All correspondence and documents concerning redemptions should
be sent to the Fund in care of its Transfer Agent, Prudential Mutual Fund
Services LLC, Attention: Redemption Services, P.O. Box 15010, New Brunswick, New
Jersey 08906-5010, the Distributor, or to your broker.
SIGNATURE GUARANTEE. If the proceeds of the redemption (1) exceed $100,000,
(2) are to be paid to a person other than the record owner, (3) are to be sent
to an address other than the address on the Transfer Agent's records, or (4) are
to be paid to a corporation, partnership, trust or fiduciary, the signature(s)
on the redemption request or stock power must be signature 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. In the case of redemptions from a PruArray Plan,
if the proceeds of the redemption are invested in another investment option of
the plan in the name of the record holder and at the same address as reflected
in the Transfer Agent's records, a signature guarantee is not required.
Payment for shares presented for redemption will be made by check within
seven days after receipt by the Transfer Agent, the Distributor or your broker
of the written request, and certificates, if issued, except as indicated below.
If you hold shares through a broker payment for shares presented for redemption
will be credited to your account at your broker, unless you indicate otherwise.
Such payment may be postponed or the right of redemption suspended at times
(1) when the New York Stock Exchange is closed for other than customary weekends
and holidays, (2) when trading on such Exchange is restricted, (3) when an
emergency exists as 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 (4) during any other
period when the Commission, by order, so permits; provided that applicable rules
and regulations of the Commission shall govern as to whether the conditions
prescribed in (2), (3) or (4) exist.
Payment for redemption of recently purchased shares will be delayed until
the Fund or its Transfer Agent has been advised that the purchase check has been
honored, which may take up to 10 calendar days from the time of receipt of the
purchase check by the Transfer Agent. Such delay may be avoided by purchasing
shares by wire or by certified or cashier's check.
REDEMPTION IN KIND. If the 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 party 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 Commission. Securities will be readily marketable and will be valued in the
same manner as in a regular redemption. If your shares are redeemed in kind, you
would incur transaction costs in converting the assets into cash. The 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 NAV 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 CDSC will be imposed on any such
involuntary redemption.
B-38
<PAGE>
90-DAY REPURCHASE PRIVILEGE. If you redeem your shares and have not
previously exercised the repurchase privilege, you may reinvest back into your
account any portion or all of the proceeds of such redemption in shares of the
same fund at the NAV next determined after the order is received, which must be
within 90 days after the date of the redemption. Any CDSC paid in connection
with such redemption will be credited (in shares) to your account. (If less than
a full repurchase is made, the credit will be on a PRO RATA basis.) You must
notify the Transfer Agent, either directly or through the Distributor or your
broker, at the time the repurchase privilege is exercised, to adjust your
account for the CDSC you previously paid. Thereafter, any redemptions will be
subject to the CDSC applicable at the time of the redemption. See "Contingent
Deferred Sales Charge" below. Exercise of the repurchase privilege may affect
federal tax treatment of the redemption.
CONTINGENT DEFERRED SALES CHARGE
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 18 months of purchase (or one year in the case of shares
purchased prior to November 2, 1998), 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 18 months, in the case of Class C shares (one year
for Class C shares purchased before November 2, 1998). 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.
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
"Shareholder Investment Account--Exchange Privilege" below.
The following table sets forth the rate of the CDSC applicable to
redemptions of Class B shares:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES
CHARGE AS A PERCENTAGE
YEAR SINCE PURCHASE OF DOLLARS INVESTED OR
PAYMENT MADE REDEMPTION PROCEEDS
- -------------------------------------------------------- -------------------------
<S> <C>
First................................................... 5.0%
Second.................................................. 4.0%
Third................................................... 3.0%
Fourth.................................................. 2.0%
Fifth................................................... 1.0%
Sixth................................................... 1.0%
Seventh................................................. None
</TABLE>
In determining whether a CDSC is applicable to a redemption, the calculation
will be made in a manner that results in the lowest possible rate. It will be
assumed that the redemption is made first of amounts representing shares
acquired pursuant to the reinvestment of dividends and distributions; then of
amounts representing the increase in NAV 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; 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
B-39
<PAGE>
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 CONTINGENT DEFERRED SALES CHARGE--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 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. For more information, call Prudential at (800) 353-2847.
Finally, the CDSC will be waived to the extent that the proceeds from shares
redeemed are invested in Prudential mutual funds, The Guaranteed Investment
Account, the Guaranteed Insulated Separate Account, or units of The Stable Value
Fund.
SYSTEMATIC WITHDRAWAL PLAN. The CDSC will be waived (or reduced) on certain
redemptions effected through the Systematic Withdrawal Plan. On an annual basis,
up to 12% of the total dollar amount subject to the CDSC may be redeemed without
charge. The Transfer Agent will calculate the total amount available for this
waiver annually on the anniversary date of your purchase or, for shares
purchased prior to March 1, 1997, on March 1 of the current year. The CDSC will
be waived (or reduced) on redemptions until this threshold 12% is reached.
In addition, the CDSC will be waived on redemptions of shares held by
Directors of the Fund.
You must notify the Fund's Transfer Agent either directly or through your
broker, 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.
In connection with these waivers, the Transfer Agent will require you to
submit the supporting documentation set forth below.
<TABLE>
<CAPTION>
CATEGORY OF WAIVER REQUIRED DOCUMENTATION
<S> <C>
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 (a copy of the trust agreement
death or to be of long-continued and identifying the grantor will be required as
indefinite duration. well)) is permanently disabled. The letter
must also indicate the date of disability.
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.
B-40
<PAGE>
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.
WAIVER OF CONTINGENT DEFERRED SALES CHARGE--CLASS C SHARES
BENEFIT PLANS. The CDSC will be waived for redemptions by certain group
retirement plans for which Prudential or brokers not affiliated with Prudential
provide administrative or recordkeeping services. The CDSC also will be waived
for certain redemptions by benefit plans sponsored by Prudential and its
affiliates. For more information, call Prudential at (800) 353-2847.
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.
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 (that is, $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 NAV 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.
B-41
<PAGE>
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 purchase 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 would 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 (1) that the
dividends and other distributions paid on Class A, Class B, Class C and Class Z
shares will not constitute "preferential dividends" under the Internal Revenue
Code and (2) 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.
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 at net asset
value per share. 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 by the record date, cash payment will be made directly to the broker.
Any shareholder who receives dividends or distributions in cash may subsequently
reinvest any such dividend or distribution at NAV by returning the check to the
Transfer Agent within 30 days after the payment date. Such reinvestment will be
made at the NAV next determined after receipt of the check by the Transfer
Agent. Shares purchased with reinvested dividends and/or distributions will not
be subject to CDSC upon redemption.
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 the relative NAV next determined after receipt of an order
in proper form. An exchange will be treated as a redemption and purchase for tax
purposes. Shares may be exchanged for shares of another fund only if shares of
such fund may legally be sold under applicable state laws. 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.
In order to exchange shares by telephone, you must authorize telephone
exchanges on your initial application form or by written notice to the Transfer
Agent and hold shares in non-certificate form. Thereafter, you may call the Fund
at (800) 225-1852 to execute a telephone exchange of shares, on weekdays, except
holidays, between the hours of 8:00 a.m. and 8:00 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
B-42
<PAGE>
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.
If you hold shares through Prudential Securities, you must exchange your
shares by contacting your Prudential Securities financial adviser.
If you hold certificates, the certificates must be returned in order for the
shares to be exchanged.
You may also exchange shares by mail by writing to Prudential Mutual Fund
Services LLC, Attention: Exchange Processing, P.O. Box 15010, New Brunswick, New
Jersey 08906-5010.
In periods of severe market or economic conditions the telephone exchange of
shares may be difficult to implement and you should make exchanges by mail by
writing to Prudential Mutual Fund Services LLC, at the address noted above.
CLASS A. Shareholders of the Fund may exchange their Class A shares for
Class A shares of certain other Prudential mutual funds, shares of Prudential
Government Securities Trust (Short-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, Inc.
Prudential Tax-Free Money Fund, Inc.
CLASS B AND CLASS C. Shareholders of the Fund may exchange their Class B and
Class C shares for Class B and Class C shares, respectively, of certain other
Prudential mutual funds and shares of Prudential Special Money Market Fund,
Inc., a money market mutual 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 the 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
an eligible money market fund without imposition of any CDSC at the time of
exchange. Upon subsequent redemption from such money market fund or after re-
exchange into the Fund, such shares 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
B-43
<PAGE>
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.
CLASS Z. Class Z shares may be exchanged for Class Z shares of other
Prudential mutual funds.
Additional details about the exchange privilege 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 (60) days' notice, and any fund, including the Fund, or Prudential
Securities, has the right to reject any exchange application relating to such
Fund's shares.
SPECIAL EXCHANGE PRIVILEGES. A special exchange privilege is available for
shareholders who qualify to purchase Class A shares at NAV and for shareholders
who qualify to purchase Class Z shares. 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 for shareholders who qualify to purchase Class A shares at NAV on a
quarterly basis, unless the shareholder elects otherwise. Similarly,
shareholders who qualify to purchase Class Z shares will have their Class B and
Class C shares which are not subject to a CDSC and their Class A shares
exchanged for Class Z shares on a quarterly basis. 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, Prusec or
another broker that they are eligible for this special exchange privilege.
Participants in any fee-based program for which the Fund is an available
option will have their Class A shares, if any, exchanged for Class Z shares when
they elect to have those assets become a part of the fee-based program. Upon
leaving the program (whether voluntarily or not), such Class Z shares (and, to
the extent provided for in the program, Class Z shares acquired through
participation in the program) will be exchanged for Class A shares at net asset
value. Similarly, participants in Prudential Securities' 401(k) Plan for which
the Fund's Class Z shares is an available option and who wish to transfer their
Class Z shares out of the Prudential Securities 401(k) Plan following separation
from service (that is, voluntary or involuntary termination of employment or
retirement) will have their Class Z shares exchanged for Class A shares at NAV.
The Prudential Securities Cash Balance Pension Plan may only exchange its
Class Z shares for Class Z shares of those Prudential mutual funds which permit
investment by the Prudential Securities Cash Balance Pension Plan.
Additional details about the exchange privilege and prospectuses for each of
the Prudential mutual funds are available from the Fund's Transfer Agent, the
Distributor or your broker. The exchange privilege may be modified, terminated
or suspended on sixty days' notice, and any fund, including the Fund, or the
Distributor, has the right to reject any exchange application relating to such
fund's shares. See "How to Buy, Sell and Exchange Shares of the Fund--Frequent
Trading" in the Prospectus.
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 $6,000 at a public
university. Assuming these costs increase at a rate of 7% a year, as has been
projected, for the freshman class of 2011, the cost of four years at a private
college could reach $210,000 and over $90,000 at a public university.(1)
- ------------------------
(1) Source information concerning the costs of education at public and private
universities is available from The College Board Annual Survey of Colleges,
1993. Average costs for private institutions include tuition, fees, room and
board for its 1993-1994 academic year.
B-44
<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........................................ $ 105 $ 158 $ 210 $ 263
20 Years........................................ 170 255 340 424
15 Years........................................ 289 433 578 722
10 Years........................................ 547 820 1,093 1,366
5 Years........................................ 1,361 2,041 2,721 3,402
See "Automatic Investment Plan (AIP)" below.
</TABLE>
- ------------------------
(2) The chart assumes an effective rate of return of 8% (assuming monthly
compounding). This example is for illustrative purposes only and is not intended
to reflect the performance of an investment in shares of the Fund. The
investment return and principal value of an investment will fluctuate so that an
investor's shares when redeemed may be worth more or less than their original
cost.
AUTOMATIC INVESTMENT PLAN (AIP)
Under AIP, an investor may arrange to have a fixed amount automatically
invested in shares of the Fund monthly by authorizing his or her bank account or
Prudential Securities account (including a Prudential Securities COMMAND
Account) to be debited to invest specified dollar amounts for subsequent
investment into the Fund. The investor's bank must be a member of the Automatic
Clearing House System. Stock certificates are not issued to AIP participants.
Further information about this program and an application form can be
obtained from the Transfer Agent, the Distributor or your broker.
SYSTEMATIC WITHDRAWAL PLAN
A systematic withdrawal plan is available to shareholders through Prudential
Securities or the Transfer Agent. Such withdrawal plan provides for monthly,
quarterly, semi-annual or annual redemption checks in any amount, except as
provided below, up to the value of the shares in the shareholder's account.
Systematic withdrawals of Class B or Class C shares may be subject to a CDSC.
See "How to Buy, Sell and Exchange Shares of the Fund--How to Sell Your Shares--
Contingent Deferred Sales Charge" in the Prospectus.
In the case of shares held through the Transfer Agent (1) a $10,000 minimum
account values applies, (2) systematic withdrawals may not be for less than $100
and (3) all dividends and/or distributions must be automatically reinvested in
additional full and fractional shares of the Fund in order for the shareholder
to participate in the plan. See "Automatic Reinvestment of Dividends and/or
Distributions" above.
The Transfer Agent, the Distributor or your broker acts as an agent for the
shareholder in redeeming sufficient full and fractional shares to provide the
amount of the systematic 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.
Systematic withdrawal payments should not be considered as dividends, yield
or income. If systematic withdrawals continuously exceed reinvested dividends
and distributions, the shareholder's original investment will be correspondingly
reduced and ultimately exhausted.
Furthermore, each systematic withdrawal constitutes a redemption of shares,
and any gain or loss realized must be recognized for federal income tax
purposes. In addition, systematic withdrawals made concurrently with purchases
of additional shares are inadvisable because of the sales charges applicable to
(1) the purchase of Class A and Class C shares and (2) 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-45
<PAGE>
TAX-DEFERRED RETIREMENT PLANS
Various tax-deferred retirement plans, including 401(k) plans, self-directed
individual retirement accounts and "tax-sheltered accounts" under Section
403(b)(7) of the Internal Revenue Code are available through Prudential
Securities. 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, administration and custodial fees as well as other plan 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 (or, in the case of a Roth IRA, the avoidance of
federal income tax on such income). 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
a traditional IRA account will be subject to tax when withdrawn from the
account. Distributions from a Roth IRA which meet the conditions under the
Internal Revenue Code will not be subject to tax withdrawal from the account.
MUTUAL FUND PROGRAMS
From time to time, the Fund may be included in a mutual fund program with
other Prudential mutual funds. Under such a program, a group of portfolios will
be selected and thereafter marketed collectively. Typically, these programs are
created with an investment theme, such as, pursuit of greater diversification,
protection from interest rate movements or access to different management
styles. In the event such a program is instituted, there may be a minimum
investment requirement for the program as a whole. 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 a program. Since the allocation of portfolios included in a program may not
be appropriate for all investors, investors should consult their Prudential
Securities Financial Adviser or Prudential/Pruco Securities Representative
concerning the appropriate blends of portfolios for them. If investors elect to
purchase the individual mutual funds that constitute a program in an investment
ratio different from that offered by the program, the standard minimum
investment requirements for the individual mutual funds will apply.
NET ASSET VALUE
The price an investor pays for each share is based on the share value. The
Fund's share value--known as the net asset value per share or NAV--is determined
by subtracting its liabilities from the value of its assets and dividing the
remainder by the number of outstanding shares. NAV is calculated separately for
each class. The Directors have fixed the specific time of day for the
computation of the Fund's net asset value to be as of 4:15 p.m., New York time.
B-46
<PAGE>
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 or, if there was no sale on the applicable commodities exchange or
board of trade on such day; at 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. Quotations of foreign securities in a foreign
currency are converted to U.S. dollar equivalents at the current rate obtained
from a recognized bank or dealer, and foreign currency forward contracts are
valued at the current cost of covering or offsetting such contracts. 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 NAV 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 NAV. 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.
TAXES, DIVIDENDS AND DISTRIBUTIONS
The Fund is qualified as, intends to remain qualified as, and has elected to
be treated as a regulated investment company under Subchapter M of the Internal
Revenue Code for each taxable year. Qualification of the Fund as a regulated
investment company under the Internal Revenue Code requires the Fund to, among
other things, (a) derive at least 90% of its gross income (without offset for
losses from the sale or other disposition of stock, 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 related to its business of investing in such stock or securities
and currencies, including, but not limited to, gains derived from options and
futures on such securities or foreign currencies; and (b) 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 stock
or 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 or close out 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. 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. The
Fund intends to make sufficient distributions to avoid imposition of excise tax.
B-47
<PAGE>
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 capital gains (the excess of net capital gains from the
sale of assets held for more than 12 months over net short-term capital loss),
if any, are taxable as capital gains regardless of how long the investor has
held his or her Fund shares. The maximum capital gains rate for individuals is
20%. The maximum capital gains rate for corporate shareholders is currently the
same as the maximum tax rate for ordinary income. Shareholders will be notified
annually by the Fund as to the federal tax status of distributions made by the
Fund. Dividends paid by the Fund will not be subject to the dividends received
deduction available to corporations. Distributions and gains from the sale,
redemption or exchange of shares of the Fund may be subject to additional state,
local and foreign taxes. Shareholders are urged to consult their tax advisers
regarding specific questions as to federal, state, local or foreign taxes.
Shareholders electing to receive dividends and distributions in the form of
additional shares will have a cost basis for federal income tax purposes in each
share so received equal to the NAV of a share of the Fund on the reinvestment
date.
Dividends and distributions generally are taxable to shareholders in the
year in which they are received; however, dividends declared in October,
November and December and paid on the following January will be treated as
having been paid on December 31 of such prior year. Under this rule, a
shareholder may be taxed in one year on dividends received in the following
January.
Any dividends or capital gains distributions paid shortly after a purchase
by an investor may have the effect of reducing the per share net asset value of
the investor's shares by the per share amount of the dividends or capital gains
distributions. Furthermore, such dividends or capital gains distributions,
although in effect a return of capital, are subject to federal income taxes.
Therefore, prior to purchasing shares of the Fund, the investor should carefully
consider the impact of dividends or capital gains distributions, which are
expected to be or have been announced.
Dividends of net investment income and distributions of net short-term
capital gains paid to a shareholder (including a shareholder acting as a nominee
or fiduciary) who is a nonresident alien individual, a foreign corporation or a
foreign partnership (foreign shareholder) are subject to a 30% (or lower treaty
rate) withholding tax upon the gross amount of the dividends or distributions
unless the dividends or distributions are effectively connected with a U.S.
trade or business conducted by the foreign shareholder. Capital gain
distributions paid to a foreign shareholder are generally not subject to
withholding tax. A foreign shareholder will, however, be required to pay U.S.
income tax on any dividends and capital gain distributions which are effectively
connected with a U.S. trade or business of the foreign shareholder.
Upon a sale or exchange of its shares, a shareholder will realize a taxable
gain or loss depending on its basis in the shares. Such gain or loss will be
treated as capital gain or loss if the shares are capital assets in the
shareholder's hands. In the case of an individual, any such capital gain will be
treated as short-term capital gain, taxable at the same rates as ordinary income
if the shares were held for not more than 12 months and capital gain taxable at
the maximum rate of 20% if such shares were held for more than 12 months. In the
case of a corporation, any such capital gain will be treated as long-term
capital gain, taxable at the same rates as ordinary income, if such shares were
held for more than 12 months. Any such loss will be treated as long-term capital
loss if such shares were held for more than 12 months. A loss recognized on the
sale or exchange of shares held for six months or less, however, will be treated
as long-term capital loss to the extent of any long-term capital gains
distribution with respect to such shares.
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. Under certain circumstances, a shareholder
who acquires shares of the Fund and sells, exchanges or otherwise disposes of
such shares within 90 days of acquisition may not be allowed to include 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.
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 distribution requirements discussed above, 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.
B-48
<PAGE>
Income received by the Fund from sources within foreign countries may be
subject to withholding and other taxes imposed by such countries. Income tax
treaties between certain countries and the United States may reduce or eliminate
such taxes. It is impossible to determine in advance the effective rate of
foreign tax to which the Fund will be subject since the amount of the Fund's
assets to be invested in various countries will vary.
The Fund has a capital loss carryforward for federal income tax purposes as
of February 29, 2000 of approximately $124,629,000, of which $17,809,000 expires
in 2001, $2,920,000 expires in 2002, $66,560,000 expires in 2003, $717,000
expires in 2004, $17,950,000 expires in 2005, and $18,673,000 expires in 2008.
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 dividends on Class A shares will be lower than the per share dividends on
Class Z shares. The per share distributions of net capital gains, if any, will
be paid in the same amount for Class A, Class B, Class C and Class Z 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 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 their fair market value
on the last day of the Fund's taxable year. 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.
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 gains or 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, change short-term losses into
long-term losses, or change capital gains into ordinary income. 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 to Section 1256 contracts
which are part of a mixed straddle. 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
B-49
<PAGE>
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 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, change short-term losses into long-term losses, or change
capital gains into ordinary income. 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, Class C
and Class Z 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 29, 2000 with the waiver of
distribution and service (12b-1) fees and/ or expense subsidization for the
Fund's Class A, Class B, Class C and Class Z shares was 5.91%, 5.59%, 5.61% and
6.41%, respectively. The yield for the 30-day period ended February 29, 2000
without waiver of distribution and service (12b-1) fees and/or expense
subsidization for the Fund's Class A, Class B, Class C and Class Z shares was
5.91%, 5.59%, 5.61%, and 6.41%, 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.
B-50
<PAGE>
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 "Risk/Return
Summary--Evaluating 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.
Below are the average annual total returns for the Fund's share classes for
the periods ended February 29, 2000.
<TABLE>
<CAPTION>
WITH WAIVER AND/OR
EXPENSE SUBSIDY 1 YEAR 5 YEARS 10 YEARS SINCE INCEPTION
- ---------------------- -------------- -------------- --------------- -----------------
<S> <C> <C> <C> <C>
Class A............... -4.14% 5.37% 6.59% 6.46%(1-22-90)
Class B............... -5.83% 5.36% 6.26% 6.99%(4-22-85)
Class C............... -2.75% 5.39% N/A 5.33%(8-1-94)
Class Z............... 0.09% N/A N/A 4.72%(3-4-96)
</TABLE>
<TABLE>
<CAPTION>
WITHOUT WAIVER AND/OR
EXPENSE SUBSIDY* 1 YEAR 5 YEARS 10 YEARS SINCE INCEPTION
- ---------------------- -------------- -------------- --------------- -----------------
<S> <C> <C> <C> <C>
Class A............... -4.14% 5.37% 6.59% 6.46%(1-22-90)
Class B............... -5.83% 5.36% 6.26% 6.92%(4-22-85)
Class C............... -2.75% 5.39% N/A 5.33%(8-1-94)
Class Z............... 0.09% N/A N/A 4.72%(3-4-96)
</TABLE>
AGGREGATE TOTAL RETURN. The Fund may also advertise its aggregate total
return. Aggregate total return is determined separately for Class A, Class B,
Class C and Class Z shares. See "Risk/Return Summary--Evaluating 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.
B-51
<PAGE>
Below are the aggregate total returns for the Fund's share classes for the
periods ended February 29, 2000.
<TABLE>
<CAPTION>
WITH WAIVER AND/OR
EXPENSE SUBSIDY 1 YEAR 5 YEARS 10 YEARS SINCE INCEPTION
- ---------------------- --------------- --------------- --------------- -----------------
<S> <C> <C> <C> <C>
Class A............... -0.15% 35.28% 97.25% 96.11%(1-22-90)
Class B............... -0.83% 30.80% 83.49% 172.77%(4-22-85)
Class C............... -0.76% 31.31% N/A 34.93%(8-1-94)
Class Z............... 0.09% N/A N/A 20.23%(3-4-96)
</TABLE>
<TABLE>
<CAPTION>
WITHOUT WAIVER AND/OR
EXPENSE SUBSIDY* 1 YEAR 5 YEARS 10 YEARS SINCE INCEPTION
- ---------------------- -------------- -------------- --------------- -----------------
<S> <C> <C> <C> <C>
Class A............... -0.15% 35.28% 97.25% 96.11%(1-22-90)
Class B............... -0.83% 30.80% 83.49% 170.17%(4-22-85)
Class C............... -0.76% 31.31% N/A 34.93%(8-1-94)
Class Z............... 0.09% N/A N/A 20.23%(3-4-96)
</TABLE>
ADVERTISING. Advertising materials for the Fund may include biographical
information relating to its portfolio manager(s), and may include or refer to
commentary by the Fund's manager(s) concerning investment style, investment
discipline, asset growth, current or past business experience, business
capabilities, political, economic or financial conditions and other matters of
general interest to investors. Advertising materials for the Fund also may
include mention of The Prudential Insurance Company of America, its affiliates
and subsidiaries, and reference the assets, products and services of those
entities.
From time to time, advertising materials for the Fund may include
information concerning retirement and investing for retirement, may refer to the
approximate number of Fund interest holders and may refer to Lipper rankings or
Morningstar ratings, other related analyses supporting those ratings, other
industry publications, business periodicals and market indices. In addition,
advertising materials may reference studies or analyses performed by the Manager
or its affiliates. Advertising materials for sector funds, funds that focus on
market capitalizations, index funds and international/global funds may discuss
the potential benefits and risks of that investment style. Advertising materials
for fixed income funds may discuss the benefits and risks of investing in the
bond market including discussions of credit quality, duration and maturity.
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)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
A LOOK AT PERFORMANCE
OVER THE LONG-TERM
AVERAGE ANNUAL RETURNS
12/31/25 - 12/31/99
COMMON STOCKS LONG-TERM GOVT. BONDS INFLATION
<S> <C> <C>
11.4% 5.1% 3.1%
</TABLE>
(1)Source: Ibbotson Associates. Used with permission. All rights reserved.
Common stock returns are based on the Standard & Poor's 500 Composite Stock
Price 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.
Investors cannot invest directly in an index. Past performance is not a
guarantee of future results.
B-52
<PAGE>
Prudential Government Income Fund, Inc.
Portfolio of Investments as of February 29, 2000
<TABLE>
<CAPTION>
Principal
Amount
(000) Description Value (Note 1)
<C> <S> <C>
- -----------------------------------------------------------------------------------------
LONG-TERM INVESTMENTS 103.2%
<CAPTION>
- -------------------------------------------------------------------------------------
U.S. Government Agency Mortgage Pass-Throughs 38.6%
<C> <S> <C>
Federal Home Loan Mortgage Corp.,
$ 9,703 5.75%, 4/15/10 $ 9,430,180
386(c) 7.50%, 6/01/24 381
4,000 8.00%, 1/01/22 - 5/01/23 4,036,879
1,838 8.50%, 12/01/10 - 3/01/20 1,873,817
4,043 9.00%, 1/01/20 4,164,442
946 11.50%, 10/01/19 1,027,414
Federal National Mortgage Assoc.,
94,500(a) 6.00%, 3/01/15 - 3/01/30 87,999,005
87,427(a) 7.00%, 7/01/03 - 3/01/30 83,983,594
31,059 7.125%, 2/01/07 30,408,331
66,394(a) 7.50%, 12/01/06 - 3/01/30 65,693,260
7(b) 8.00%, 10/01/24 7,270
2,310 8.50%, 6/01/17 - 3/01/25 2,370,307
3,101 9.00%, 8/01/24 - 4/01/25 3,208,802
635 9.50%, 10/01/19 - 3/01/25 668,805
Government National Mortgage Assoc.,
83,187 7.00%, 2/15/09 - 3/01/30 79,991,933
40,868(b) 7.50%, 5/15/02 - 3/01/30 40,341,417
601 8.00%, 7/15/16 - 3/15/24 606,666
7,705 9.50%, 10/15/09 - 12/15/17 8,167,663
Government National Mortgage Assoc. II,
1,275 9.50%, 5/20/18 - 7/20/21 1,337,408
--------------
Total U.S. Government Agency Mortgage
Pass-Throughs
(cost $423,849,686) 425,317,574
<CAPTION>
- -------------------------------------------------------------------------------------
U.S. Government Obligations 34.9%
<C> <S> <C>
United States Treasury Bonds,
10,000 7.125%, 2/15/23 10,857,800
20,000(e) 8.125%, 8/15/19 23,659,400
30,400 8.125%, 8/15/21 36,332,864
20,000(b) 8.75%, 5/15/17 24,634,400
12,000 8.75%, 8/15/20 15,105,000
42,800(b) 10.00%, 5/15/10 48,584,848
3,000(b) 12.00%, 8/15/13 3,986,730
</TABLE>
B-53 See Notes to Financial Statements
<PAGE>
Prudential Government Income Fund, Inc.
Portfolio of Investments as of February 29, 2000 Cont'd.
<TABLE>
<CAPTION>
Principal
Amount
(000) Description Value (Note 1)
- -----------------------------------------------------------------------------------------
<C> <S> <C>
United States Treasury Bonds,
$ 6,300(b) 12.50%, 8/15/14 $ 8,775,711
68,400(b) 12.75%, 11/15/10 87,124,500
United States Treasury Notes,
29,750(d) 6.50%, 2/15/10 29,926,715
44,000(b) 11.75%, 2/15/10 52,902,960
United States Treasury Strips,
6,100 Zero Coupon, 11/15/09 3,219,092
81,500 Zero Coupon, 11/15/15 30,116,695
27,000 Zero Coupon, 5/15/17 9,148,410
--------------
Total U.S. Government Obligations
(cost $413,860,814) 384,375,125
<CAPTION>
- -------------------------------------------------------------------------------------
U.S. Government Agency Securities 20.0%
<C> <S> <C>
25,000(b) Federal Home Loan Bank,
5.75%, 10/15/07 24,562,500
Federal National Mortgage Assoc., M.T.N.,
13,500 5.875%, 4/23/04 12,841,875
40,000(b) 6.06%, 5/21/03 38,612,400
15,000 6.30%, 9/25/02 14,688,300
Small Business Administration,
15,414 Ser. 1995-20B, 8.15%, 2/01/15 15,775,241
19,707 Ser. 1995-20L, 6.45%, 12/01/15 18,510,416
28,363 Ser. 1996-20H, 7.25%, 8/01/16 27,733,810
17,145 Ser. 1996-20K, 6.95%, 11/01/16 16,507,287
8,648 Ser. 1997-20A, 7.15%, 1/01/17 8,409,588
13,827 Ser. 1998-20I, 6.00%, 9/01/18 12,564,587
Tennessee Valley Authority,
600 Ser. 1993-D, 7.25%, 7/15/43 565,536
30,000(b) Ser. 1995-B, 6.235%, 7/15/45 29,751,000
--------------
Total U.S. Government Agency Securities
(cost $230,427,757) 220,522,540
</TABLE>
See Notes to Financial Statements B-54
<PAGE>
Prudential Government Income Fund, Inc.
Portfolio of Investments as of February 29, 2000 Cont'd.
<TABLE>
<CAPTION>
Principal
Amount
(000) Description Value (Note 1)
- -----------------------------------------------------------------------------------------
Corporate Bonds 6.9%
<C> <S> <C>
$ 22,000(b) Merck and Co.,
5.76%, 5/03/37, M.T.N. $ 22,000,000
55,000(d) New Jersey Economic Development Authority,
Ser. A, 7.425%, 2/15/29 53,728,125
--------------
Total Corporate Bonds (cost $79,214,850) 75,728,125
<CAPTION>
- -------------------------------------------------------------------------------------
Collateralized Mortgage Obligation 0.7%
<C> <S> <C>
4,564 Resolution Trust Corp.,
Ser. 1994-1, Class B2,
7.75%, 9/25/29 4,385,390
997 Ryland Mortgage Participation Securities,
Ser. 1993-3, Class A3,
7.061%, 9/25/24, (ARM) 946,701
2,207 Structured Asset Securities Corp.,
Ser. 1995-C1, Class C,
7.375%, 9/25/24 2,200,985
--------------
Total Collateralized Mortgage Obligation
(cost $7,379,232) 7,533,076
<CAPTION>
- -------------------------------------------------------------------------------------
U.S. Government Agency - Stripped Security 1.2%
<C> <S> <C>
5,000 Financing Corp.,
Zero Coupon, 3/07/04 3,767,800
19,543 Israel AID,
Zero Coupon, 8/15/09 10,059,404
--------------
Total U.S. Government Agency-Stripped Security
(cost $13,863,091) 13,827,204
<CAPTION>
- -------------------------------------------------------------------------------------
Asset Backed Securities 0.9%
<C> <S> <C>
10,000 Aesop Funding II LLC,
Ser. 1997-1, Class A2,
6.40%, 10/20/03
(cost $9,998,438) 9,797,118
--------------
Total Long-Term Investments (cost $1,178,593,868) 1,137,100,762
</TABLE>
B-55 See Notes to Financial Statements
<PAGE>
Prudential Government Income Fund, Inc.
Portfolio of Investments as of February 29, 2000 Cont'd.
<TABLE>
<CAPTION>
Principal
Amount
(000) Description Value (Note 1)
- -----------------------------------------------------------------------------------------
<C> <S> <C>
SHORT-TERM INVESTMENTS 20.0%
<CAPTION>
- -------------------------------------------------------------------------------------
Corporate Bonds 10.2%
<C> <S> <C>
$ 18,000 Invensys PLC,
5.90%, 3/01/00 $ 18,000,000
44,000 SBC Communications, Inc.,
5.80%, 3/13/00 43,914,933
13,700 Transamerica Finance Corp.,
5.80%, 3/08/00 13,684,550
8,931 Triple A One Funding Corp.,
5.82%, 3/09/00 8,919,449
28,200 5.82%, 3/10/00 28,158,969
--------------
Total Corporate Bonds (cost $112,677,901) 112,677,901
<CAPTION>
- -------------------------------------------------------------------------------------
REPURCHASE AGREEMENT 9.8%
<C> <S> <C>
107,913 Joint Repurchase Agreement Account,
5.66%, 3/01/00
(cost $107,913,000; Note 5) 107,913,000
--------------
Total Short-Term Investments (cost $220,590,901) 220,590,901
Total Investments 123.2% (cost $1,399,184,769;
Note 4) 1,357,691,663
Liabilities in excess of other assets (23.2%) (255,780,536)
--------------
Net Assets 100% $1,101,911,127
--------------
--------------
</TABLE>
- ------------------------------
AID--Agency for International Development
ARM--Adjustable Rate Mortgage
M.T.N.--Medium-Term Note
(a) Partial principal amount of $189,745,000 represents a to-be-announced
('TBA') mortgage dollar roll, see Notes 1 and 4.
(b) Partial principal amount pledged as collateral for mortgage dollar roll.
(c) Represents actual principal amount (not rounded to nearest thousand).
(d) Securities, or portion thereof, on loan, see Note 4.
(e) Partial principal amount pledged as collateral for financial future
contracts.
See Notes to Financial Statements B-56
<PAGE>
Prudential Government Income Fund, Inc.
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
February 29, 2000
<S> <C>
- ----------------------------------------------------------------------------------------
ASSETS
Investments including repurchase agreement, at value
(cost $1,399,184,769) $ 1,357,691,663
Cash 360,790
Receivable for investments sold 153,155,594
Interest receivable 11,205,976
Receivable for Fund shares sold 659,834
Prepaid expenses and other assets 198,968
-----------------
Total assets 1,523,272,825
-----------------
LIABILITIES
Payable for investments purchased 416,097,146
Payable for Fund shares reacquired 3,120,412
Accrued expenses and other liabilities 952,208
Management fee payable 439,270
Dividends payable 397,495
Distribution fee payable 293,495
Due to broker - variation margin 61,672
-----------------
Total liabilities 421,361,698
-----------------
NET ASSETS $ 1,101,911,127
-----------------
-----------------
Net assets were comprised of:
Common stock, at par $ 1,310,526
Paid-in capital in excess of par 1,284,768,029
-----------------
1,286,078,555
Accumulated net realized loss on investments (142,627,228)
Net unrealized depreciation on investments (41,540,200)
-----------------
Net assets, February 29, 2000 $ 1,101,911,127
-----------------
-----------------
</TABLE>
B-57 See Notes to Financial Statements
<PAGE>
Prudential Government Income Fund, Inc.
Statement of Assets and Liabilities Cont'd.
<TABLE>
<CAPTION>
February 29, 2000
- ----------------------------------------------------------------------------------------
<S> <C>
Class A:
Net asset value and redemption price per share
($806,619,622 DIVIDED BY 95,936,576 shares of common stock
issued and outstanding) $8.41
Maximum sales charge (4% of offering price) .35
-----------------
Maximum offering price to public $8.76
-----------------
-----------------
Class B:
Net asset value, offering price and redemption price per
share
($193,393,517 DIVIDED BY 22,985,362 shares of common stock
issued and outstanding) $8.41
-----------------
-----------------
Class C:
Net asset value and redemption price per share
($8,508,350 DIVIDED BY 1,011,211 shares of common stock issued
and outstanding) $8.41
Sales charge (1% of offering price) .08
-----------------
Offering price to public $8.49
-----------------
-----------------
Class Z:
Net asset value, offering price and redemption price per
share
($93,389,638 DIVIDED BY 11,119,437 shares of common stock
issued and outstanding) $8.40
-----------------
-----------------
</TABLE>
See Notes to Financial Statements B-58
<PAGE>
Prudential Government Income Fund, Inc.
Statement of Operations
<TABLE>
<CAPTION>
Year Ended
February 29, 2000
<S> <C>
- ----------------------------------------------------------------------------------------
NET INVESTMENT INCOME
Income
Interest $ 89,843,725
-----------------
Expenses
Management fee 6,136,364
Distribution fee--Class A 2,143,964
Distribution fee--Class B 2,168,616
Distribution fee--Class C 67,605
Transfer agent's fees and expenses 2,024,000
Reports to shareholders 115,000
Custodian's fees and expenses 86,000
Audit fee and expenses 44,000
Directors' fees and expenses 27,000
Registration fees 25,000
Insurance expense 19,000
Legal fees and expenses 10,000
Miscellaneous 678
-----------------
Total expenses 12,867,227
-----------------
Net investment income 76,976,498
-----------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized loss on:
Investment transactions (34,938,279)
Financial futures contracts (1,732,583)
-----------------
(36,670,862)
-----------------
Net change in unrealized appreciation/depreciation on:
Investments (45,313,972)
Financial futures contracts (47,094)
-----------------
(45,361,066)
-----------------
Net loss on investments (82,031,928)
-----------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $ (5,055,430)
-----------------
-----------------
</TABLE>
B-59 See Notes to Financial Statements
<PAGE>
Prudential Government Income Fund, Inc.
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Year Ended
February 28/29,
--------------------------------
2000 1999
- ---------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations
Net investment income $ 76,976,498 $ 73,602,481
Net realized gain (loss) on investment
transactions (36,670,862) 23,727,086
Net change in unrealized
appreciation/depreciation on investments (45,361,066) (36,161,034)
-------------- --------------
Net increase (decrease) in net assets
resulting from operations (5,055,430) 61,168,533
-------------- --------------
Dividends from net investment income (Note
1)
Class A (54,772,627) (50,553,420)
Class B (15,174,492) (17,378,979)
Class C (531,416) (268,163)
Class Z (6,497,963) (5,401,919)
-------------- --------------
(76,976,498) (73,602,481)
-------------- --------------
Fund share transactions (net of share
conversions) (Note 6):
Net proceeds from shares subscribed 242,255,365 393,970,010
Net asset value of shares issued to
shareholders in reinvestment of
dividends 51,114,813 47,502,780
Cost of shares reacquired (453,755,385) (337,878,336)
-------------- --------------
Net increase (decrease) in net assets from
Fund share transactions (160,385,207) 103,594,454
-------------- --------------
Total increase (decrease) (242,417,135) 91,160,506
NET ASSETS
Beginning of year 1,344,328,262 1,253,167,756
-------------- --------------
End of year $1,101,911,127 $1,344,328,262
-------------- --------------
-------------- --------------
</TABLE>
See Notes to Financial Statements B-60
<PAGE>
Prudential Government Income Fund, Inc.
Notes to Financial Statements
Prudential Government Income Fund, Inc., (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 high current income. The Fund will seek
to achieve this objective by investing primarily in U.S. Government Securities,
including U.S. Treasury bills, notes, bonds, strips and other debt securities
issued by the U.S. Treasury, and obligations, including mortgage-related
securities, issued or guaranteed by U.S. Government agencies or
instrumentalities.
Note 1. Accounting Policies
The following is a summary of significant accounting policies followed by the
Fund in the preparation of its financial statements.
Security Valuation: The Fund values portfolio securities (including
commitments to purchase such securities on a 'when-issued' basis) 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. Financial 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, at the mean between the most
recently quoted bid and asked prices. Should an extraordinary event, which is
likely to affect the value of a 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 under the general supervision of the Fund's 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.
Repurchase Agreements: In connection with repurchase agreements with
U.S. financial institutions, it is the Fund's policy that its custodian, or
designated subcustodians as the case may be under triparty repurchase
agreements, takes possession of the underlying collateral securities, the value
of which exceeds the principal amount of the repurchase agreement transaction,
including accrued interest. To the extent that any repurchase agreement
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.
B-61
<PAGE>
Prudential Government Income Fund, Inc.
Notes to Financial Statements Cont'd.
Financial Futures Contracts: A financial futures contract is an
agreement to purchase (long) or sell (short) an agreed amount of securities at a
set price for delivery on a future date. Upon entering into a financial futures
contract, the Fund is required to pledge to the broker an amount of cash and/or
other assets equal to a certain percentage of the contract amount. This amount
is known as the 'initial margin.' Subsequent payments, known as 'variation
margin,' are made or received by the Fund each day, depending on the daily
fluctuation in the value of the underlying security. Such variation margin is
recorded for financial statement purposes on a daily basis as unrealized gain or
loss. When the contract expires or is closed, the gain or loss is realized and
is presented in the statement of operations as net realized gain (loss) on
financial futures contracts.
The Fund invests in financial futures contracts in order to hedge its
existing portfolio securities, or securities the Fund intends to purchase,
against fluctuations in value caused by changes in prevailing interest rates.
Should interest rates move unexpectedly, the Fund may not achieve the
anticipated benefits of the financial futures contracts and may realize a loss.
The use of futures transactions involves the risk of imperfect correlation in
movements in the price of futures contracts, interest rates and the underlying
hedged assets.
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.
B-62
<PAGE>
Prudential Government Income Fund, Inc.
Notes to Financial Statements Cont'd.
Securities Transactions and Net 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. The Fund accretes discount on portfolio
securities as adjustments to interest income. Net investment income (other than
distribution fees) and unrealized and realized gains or losses are allocated
daily to each class of shares based upon the relative proportion of net assets
of each class at the beginning of the day. Expenses are recorded on the accrual
basis which may require the use of certain estimates by management.
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, if any. 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 Investments Fund Management,
LLC ('PIFM'). Pursuant to this agreement, PIFM has responsibility for all
investment advisory services and supervises the subadviser's performance of such
services. PIFM 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. PIFM pays for the services of PIC,
the cost of compensation of officers of the Fund, occupancy and certain clerical
and bookkeeping costs of the Fund. The Fund bears all other costs and expenses.
The management fee paid PIFM 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 a distribution agreement with Prudential Investment
Management Services LLC ('PIMS'), which acts as the distributor of the Class A,
Class B, Class C and Class Z shares of the Fund. The Fund compensates PIMS 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.
B-63
<PAGE>
Prudential Government Income Fund, Inc.
Notes to Financial Statements Cont'd.
The distribution fees are accrued daily and payable monthly. No distribution or
service fees are paid to PIMS as distributor of the Class Z shares of the Fund.
Pursuant to the Class A Plan, the Fund compensates PIMS for its
distribution-related expenses with respect to Class A shares at an annual rate
of up to .30 of 1% of the average daily net assets of the Class A shares. Such
expenses under the Class A Plan were .25 of 1% of the average daily net assets
of the Class A shares for the year ended February 29, 2000.
Pursuant to the Class B Plan, the Fund compensates PIMS for its
distribution-related activities 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. Such expenses under the Class B Plan were .825 of 1% of the
average daily net assets of the Class B shares for the year ended February 29,
2000.
Pursuant to the Class C Plan, the Fund compensates PIMS for its
distribution-related activities at an annual rate of up to 1% of the average
daily net assets of the Class C shares. Such expenses under the Class C Plan
were .75 of 1% of the average daily net assets of the Class C shares for the
year ended February 29, 2000.
PIMS has advised the Fund that it received approximately $126,500 and
$41,500 in front-end sales charges resulting from sales of Class A and Class C
shares, respectively, during the year ended February 29, 2000. From these fees,
PIMS paid such sales charges to affiliated broker-dealers, which in turn paid
commissions to salespersons and incurred other distribution costs.
PIMS has advised the Fund that for the year ended February 29, 2000 it
received approximately $559,000 and $12,900 in contingent deferred sales charges
imposed upon redemptions by certain Class B and Class C shareholders,
respectively.
PIFM, PIC and PIMS are wholly owned subsidiaries of The Prudential
Insurance Company of America.
As of March 11, 1999, the Fund, along with other affiliated registered
investment companies (the 'Funds'), entered into a syndicated credit agreement
('SCA') with an unaffiliated lender. The maximum commitment under the SCA is $1
billion. Interest on any borrowings will be at market rates. For the period
3/11/99 - 3/9/00, the commitment fee on the unused portion of the credit
facility was .065 of 1%. Subsequent to March 9, 2000, the SCA was renewed with a
maximum commitment of $1 billion at a commitment fee of .080 of 1% of the unused
portion of the facility. The expiration date of the SCA is March 9, 2001. Prior
to March 11, 1999, the Funds had a credit agreement with a maximum commitment of
$200,000,000.
B-64
<PAGE>
Prudential Government Income Fund, Inc.
Notes to Financial Statements Cont'd.
The commitment fee was .055 of 1% on the unused portion of the credit facility.
The Fund did not borrow any amounts pursuant to either agreement during the year
ended February 29, 2000. The purpose of the credit agreements is to serve as an
alternative source of funding for capital share redemptions.
Note 3. Other Transactions With Affiliates
Prudential Mutual Fund Services LLC ('PMFS'), a wholly owned subsidiary of PIFM,
serves as the Fund's transfer agent. During the year ended February 29, 2000,
the Fund incurred fees of approximately $2,023,200 for the services of PMFS. As
of February 29, 2000, approximately $162,400 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 nonaffiliates.
Note 4. Portfolio Securities
Purchases and sales of investment securities, other than short-term investments,
for the year ended February 29, 2000, were $823,297,537 and $859,516,205,
respectively.
During the year ended February 29, 2000, the Fund entered into financial
futures contracts. Details of open contracts at February 29, 2000 are as
follows:
<TABLE>
<CAPTION>
Value at Unrealized
Number of Expiration Value at February 29, Appreciation
Contracts Type Date Trade Date 2000 (Depreciation)
- --------- ------------------ ------------ ----------- ------------ --------------
<C> <S> <C> <C> <C> <C>
Short positions: Mar.
271 10 yr. T-Note 2000 $25,829,688 $ 25,952,485 $ (122,797)
Mar.
95 10 yr. T-Note 2000 9,173,437 9,097,734 75,703
--------------
$ (47,094)
--------------
--------------
</TABLE>
The federal income tax basis of the Fund's investments at February 29,
2000 was substantially the same as for financial reporting purposes and,
accordingly, net unrealized depreciation for federal income tax purposes was
$41,493,106 (gross unrealized appreciation-$4,261,440; gross unrealized
depreciation-$45,754,546).
The Fund had a capital loss carryforward as of February 29, 2000 of
approximately $124,629,000 of which $17,809,000 expires in 2001, $2,920,000
expires in 2002, $66,560,000 expires in 2003, $717,000 expires in 2004,
$17,950,000 expires in 2005, and $18,673,000 expires in 2008. Accordingly, no
B-65
<PAGE>
Prudential Government Income Fund, Inc.
Notes to Financial Statements Cont'd.
capital gains distribution is expected to be paid to shareholders until net
gains have been realized in excess of such amounts.
The average balance of dollar rolls outstanding during the year ended
February 29, 2000 was approximately $30,121,000. The amount of dollar rolls
outstanding at February 29, 2000 was $179,103,191 (principal $189,745,000),
which was 11.8% of total assets.
As of February 29, 2000, the Fund had securities on loan with an aggregate
market value of $34,811,090. As of this date, the collateral held for securities
on loan was comprised of U.S. government securities with an aggregate market
value of $35,734,609.
Note 5. Joint Repurchase Agreement Account
The Fund, along with other affiliated registered investment companies, transfers
uninvested cash balances into a single joint account, the daily aggregate
balance of which is invested in one or more repurchase agreements collateralized
by U.S. Treasury or federal agency obligations. As of February 29, 2000, the
Fund had a 14.18% undivided interest in the repurchase agreements in the joint
account. This undivided interest represented $107,913,000 in principal amount.
As of such date, the repurchase agreements in the joint account and the value of
the collateral therefor were as follows:
Bear, Stearns & Co., Inc., 5.78%, in the principal amount of $130,000,000,
repurchase price $130,020,872, due 3/1/00. The value of the collateral including
accrued interest was $133,586,248.
Credit Suisse First Boston Corp., 5.80%, in the principal amount of
$150,000,000, repurchase price $150,024,167, due 3/1/00. The value of the
collateral including accrued interest was $155,522,342.
Deutsche Bank Securities, Inc., 5.48%, in the principal amount of
$241,170,000, repurchase price $241,206,711, due 3/1/00. The value of the
collateral including accrued interest was $245,993,670.
Warburg Dillon Read LLC, 5.55%, in the principal amount of $80,000,000,
repurchase price $80,012,333, due 3/1/00. The value of the collateral including
accrued interest was $81,604,059.
Warburg Dillon Read LLC, 5.75%, in the principal amount of $160,000,000,
repurchase price $160,025,556, due 3/1/00. The value of the collateral including
accrued interest was $163,202,757.
B-66
<PAGE>
Prudential Government Income Fund, Inc.
Notes to Financial Statements Cont'd.
Note 6. Capital
The Fund offers Class A, Class B, Class C and Class Z shares. Class A shares are
sold with a front-end sales charge of up to 4%. 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 front-end
sales charge of 1% and a contingent deferred sales charge of 1% during the first
18 months. Class B shares automatically convert to Class A shares on a quarterly
basis approximately seven years after purchase. Class Z shares are not subject
to any sales charge and are offered exclusively for sale to a limited group of
investors.
There are 2 billion shares of common stock, $.01 par value per share,
divided into four classes, designated Class A, B, C and Class Z common stock,
each of which consists of 500,000,000 authorized shares.
Transactions in shares of common stock were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- ---------------------------------------------------------- ----------- -------------
<S> <C> <C>
Year ended February 29, 2000:
Shares sold............................................... 16,424,755 $ 141,843,573
Shares issued in reinvestment of dividends................ 4,001,400 34,524,034
Shares reacquired......................................... (28,860,546) (248,688,001)
----------- -------------
Net decrease in shares outstanding before conversion...... (8,434,391) (72,320,394)
Shares issued upon conversion from Class B................ 4,701,032 40,767,586
----------- -------------
Net decrease in shares outstanding........................ (3,733,359) $ (31,552,808)
----------- -------------
----------- -------------
Year ended February 28, 1999:
Shares sold............................................... 11,337,948 $ 103,420,990
Shares issued in connection with the acquisition of
Prudential Mortgage Income Fund......................... 9,218,999 85,302,295
Shares issued in reinvestment of dividends................ 3,393,079 30,992,330
Shares reacquired......................................... (18,175,930) (166,229,454)
----------- -------------
Net increase in shares outstanding before conversion...... 5,774,096 53,486,161
Shares issued upon conversion from Class B................ 3,289,549 30,222,531
----------- -------------
Net increase in shares outstanding........................ 9,063,645 $ 83,708,692
----------- -------------
----------- -------------
Class B
- ----------------------------------------------------------
Year ended February 29, 2000:
Shares sold............................................... 3,881,043 $ 33,796,581
Shares issued in reinvestment of dividends................ 1,123,997 9,731,345
Shares reacquired......................................... (15,538,651) (134,608,190)
----------- -------------
Net decrease in shares outstanding before conversion...... (10,533,611) (91,080,264)
Shares reacquired upon conversion into Class A............ (4,695,615) (40,767,586)
----------- -------------
Net decrease in shares outstanding........................ (15,229,226) $(131,847,850)
----------- -------------
----------- -------------
</TABLE>
B-67
<PAGE>
Prudential Government Income Fund, Inc.
Notes to Financial Statements Cont'd.
<TABLE>
<CAPTION>
Class B Shares Amount
- ---------------------------------------------------------- ----------- -------------
<S> <C> <C>
Year ended February 28, 1999:
Shares sold............................................... 8,957,322 $ 82,525,127
Shares issued in connection with the acquisition of
Prudential Mortgage Income Fund......................... 5,348,280 49,472,834
Shares issued in reinvestment of dividends................ 1,197,788 10,945,704
Shares reacquired......................................... (12,229,393) (112,158,657)
----------- -------------
Net increase in shares outstanding before conversion...... 3,273,997 30,785,008
Shares reacquired upon conversion into Class A............ (3,285,972) (30,222,531)
----------- -------------
Net decrease in shares outstanding........................ (11,975) $ 562,477
----------- -------------
----------- -------------
Class C
- ----------------------------------------------------------
Year ended February 29, 2000:
Shares sold............................................... 824,481 $ 7,159,778
Shares issued in reinvestment of dividends................ 46,492 400,984
Shares reacquired......................................... (776,182) (6,687,075)
----------- -------------
Net increase in shares outstanding........................ 94,791 $ 873,687
----------- -------------
----------- -------------
Year ended February 28, 1999:
Shares sold............................................... 737,124 $ 6,785,510
Shares issued in connection with the acquisition of
Prudential Mortgage Income Fund......................... 157,565 1,457,390
Shares issued in reinvestment of dividends................ 24,242 221,821
Shares reacquired......................................... (316,198) (2,907,003)
----------- -------------
Net increase in shares outstanding........................ 602,733 $ 5,557,718
----------- -------------
----------- -------------
Class Z
- ----------------------------------------------------------
Year ended February 29, 2000:
Shares sold............................................... 6,852,261 $ 59,455,433
Shares issued in reinvestment of dividends................ 749,774 6,458,450
Shares reacquired......................................... (7,365,536) (63,772,119)
----------- -------------
Net increase in shares outstanding........................ 236,499 $ 2,141,764
----------- -------------
----------- -------------
Year ended February 28, 1999:
Shares sold............................................... 7,074,770 $ 64,867,892
Shares issued in connection with the acquisition of
Prudential Mortgage Income Fund......................... 14,932 137,972
Shares issued in reinvestment of dividends................ 585,585 5,342,925
Shares reacquired......................................... (6,169,039) (56,583,222)
----------- -------------
Net increase in shares outstanding........................ 1,506,248 $ 13,765,567
----------- -------------
----------- -------------
</TABLE>
B-68
<PAGE>
Prudential Government Income Fund, Inc.
Financial Highlights
<TABLE>
<CAPTION>
Class A
-----------------
Year Ended
February 29, 2000
- ----------------------------------------------------------------------------------------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year $ 8.98
-----------------
Income from investment operations
Net investment income 0.55
Net realized and unrealized gain (loss) on investment
transactions (0.57)
-----------------
Total from investment operations (0.02)
-----------------
Less distributions
Dividends from net investment income (0.55)
-----------------
Net asset value, end of year $ 8.41
-----------------
-----------------
TOTAL RETURN(a): (0.15)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000) $ 806,620
Average net assets (000) $ 857,586
Ratios to average net assets:
Expenses, including distribution fees 0.94%
Expenses, excluding distribution fees 0.69%
Net investment income 6.39%
For Class A, B, C and Z shares:
Portfolio turnover rate 68%
</TABLE>
- ------------------------------
(a) 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 year reported and includes reinvestment of dividends and
distributions.
B-69 See Notes to Financial Statements
<PAGE>
Prudential Government Income Fund, Inc.
Financial Highlights Cont'd.
<TABLE>
<CAPTION>
Class A
- -------------------------------------------------------------------------------------
Year Ended February 28/29,
- -------------------------------------------------------------------------------------
1999 1998 1997 1996
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
$ 9.05 $ 8.76 $ 9.04 $ 8.59
- ---------------- ---------------- ---------------- ----------------
0.55 0.58 0.60 0.60
(0.07) 0.29 (0.28) 0.45
- ---------------- ---------------- ---------------- ----------------
0.48 0.87 0.32 1.05
- ---------------- ---------------- ---------------- ----------------
(0.55) (0.58) (0.60) (0.60)
- ---------------- ---------------- ---------------- ----------------
$ 8.98 $ 9.05 $ 8.76 $ 9.04
- ---------------- ---------------- ---------------- ----------------
- ---------------- ---------------- ---------------- ----------------
5.40% 10.26% 3.70% 12.41%
$895,039 $819,536 $860,319 $945,038
$836,143 $842,431 $884,862 $909,169
0.84% 0.86% 0.90% 0.91%
0.68% 0.71% 0.75% 0.76%
6.05% 6.52% 6.78% 6.65%
106% 88% 107% 123%
</TABLE>
See Notes to Financial Statements B-70
<PAGE>
Prudential Government Income Fund, Inc.
Financial Highlights Cont'd.
<TABLE>
<CAPTION>
Class B
-----------------
Year Ended
February 29, 2000
- ----------------------------------------------------------------------------------------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 8.99
-----------------
Income from investment operations
Net investment income 0.50
Net realized and unrealized gain (loss) on investment
transactions (0.58)
-----------------
Total from investment operations (0.08)
-----------------
Less distributions
Dividends from net investment income (0.50)
-----------------
Net asset value, end of year $ 8.41
-----------------
-----------------
TOTAL RETURN(a): (0.83)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000) $ 193,394
Average net assets (000) $ 262,863
Ratios to average net assets:
Expenses, including distribution fees 1.52%
Expenses, excluding distribution fees 0.69%
Net investment income 5.77%
</TABLE>
- ------------------------------
(a) 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 year reported and includes reinvestment of dividends and
distributions.
B-71 See Notes to Financial Statements
<PAGE>
Prudential Government Income Fund, Inc.
Financial Highlights Cont'd.
<TABLE>
<CAPTION>
Class B
- -------------------------------------------------------------------------------------
Year Ended February 28/29,
- -------------------------------------------------------------------------------------
1999 1998 1997 1996
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
$ 9.05 $ 8.77 $ 9.04 $ 8.60
- ---------------- ---------------- ---------------- ----------------
0.49 0.52 0.54 0.54
(0.06) 0.28 (0.27) 0.44
- ---------------- ---------------- ---------------- ----------------
0.43 0.80 0.27 0.98
- ---------------- ---------------- ---------------- ----------------
(0.49) (0.52) (0.54) (0.54)
- ---------------- ---------------- ---------------- ----------------
$ 8.99 $ 9.05 $ 8.77 $ 9.04
- ---------------- ---------------- ---------------- ----------------
- ---------------- ---------------- ---------------- ----------------
4.83% 9.40% 3.12% 11.54%
$343,425 $346,059 $461,988 $641,946
$322,626 $385,145 $543,796 $647,515
1.50% 1.53% 1.57% 1.58%
0.68% 0.71% 0.75% 0.76%
5.39% 5.85% 6.11% 5.99%
</TABLE>
See Notes to Financial Statements B-72
<PAGE>
Prudential Government Income Fund, Inc.
Financial Highlights Cont'd.
<TABLE>
<CAPTION>
Class C
-----------------
Year Ended
February 29, 2000
- ----------------------------------------------------------------------------------------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year $ 8.99
-----------------
Income from investment operations
Net investment income 0.51
Net realized and unrealized gain (loss) on investment
transactions (0.58)
-----------------
Total from investment operations (0.07)
-----------------
Less distributions
Dividends from net investment income (0.51)
-----------------
Net asset value, end of year $ 8.41
-----------------
-----------------
TOTAL RETURN(a): (0.76)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000) $ 8,508
Average net assets (000) $ 9,014
Ratios to average net assets:
Expenses, including distribution fees 1.44%
Expenses, excluding distribution fees 0.69%
Net investment income 5.90%
</TABLE>
- ------------------------------
(a) 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 year reported and includes reinvestment of dividends and
distributions.
B-73 See Notes to Financial Statements
<PAGE>
Prudential Government Income Fund, Inc.
Financial Highlights Cont'd.
<TABLE>
<CAPTION>
Class C
- -------------------------------------------------------------------------------------
Year Ended February 28/29,
- -------------------------------------------------------------------------------------
1999 1998 1997 1996
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
$ 9.05 $ 8.77 $ 9.04 $ 8.60
- ---------------- ---------------- ---------------- ----------------
0.50 0.53 0.54 0.54
(0.06) 0.28 (0.27) 0.44
- ---------------- ---------------- ---------------- ----------------
0.44 0.81 0.27 0.98
- ---------------- ---------------- ---------------- ----------------
(0.50) (0.53) (0.54) (0.54)
- ---------------- ---------------- ---------------- ----------------
$ 8.99 $ 9.05 $ 8.77 $ 9.04
- ---------------- ---------------- ---------------- ----------------
- ---------------- ---------------- ---------------- ----------------
4.91% 9.48% 3.20% 11.63%
$ 8,236 $ 2,840 $ 2,569 $ 1,799
$ 4,878 $ 2,523 $ 2,440 $ 765
1.43% 1.46% 1.50% 1.51%
0.68% 0.71% 0.75% 0.76%
5.50% 5.92% 6.19% 5.99%
</TABLE>
See Notes to Financial Statements B-74
<PAGE>
Prudential Government Income Fund, Inc.
Financial Highlights Cont'd.
<TABLE>
<CAPTION>
Class Z
-----------------
Year Ended
February 29, 2000
- ----------------------------------------------------------------------------------------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 8.97
-----------------
Income from investment operations
Net investment income 0.57
Net realized and unrealized gain (loss) on investment
transactions (0.57)
-----------------
Total from investment operations --
-----------------
Less distributions
Dividends from net investment income (0.57)
-----------------
Net asset value, end of period $ 8.40
-----------------
-----------------
TOTAL RETURN(a): 0.09%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000) $ 93,390
Average net assets (000) $ 97,811
Ratios to average net assets:
Expenses, including distribution fees 0.69%
Expenses, excluding distribution fees 0.69%
Net investment income 6.64%
</TABLE>
- ------------------------------
(a) 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.
(b) Annualized.
(c) Commencement of offering of Class Z shares.
B-75 See Notes to Financial Statements
<PAGE>
Prudential Government Income Fund, Inc.
Financial Highlights Cont'd.
<TABLE>
<CAPTION>
Class Z
- ----------------------------------------------------------------------------------------
Year Ended February 28/29, March 4, 1999(c)
- ------------------------------------------ through February 28,
1999 1998 1997
- ----------------------------------------------------------------------------------
<S> <C> <C>
$ 9.04 $ 8.76 $ 9.13
- ---------------- ---------------- ----------
0.57 0.59 0.61
(0.07) 0.28 (0.37)
- ---------------- ---------------- ----------
0.50 0.87 0.24
- ---------------- ---------------- ----------
(0.57) (0.59) (0.61)
- ---------------- ---------------- ----------
$ 8.97 $ 9.04 $ 8.76
- ---------------- ---------------- ----------
- ---------------- ---------------- ----------
5.58% 10.30% 3.16%
$ 97,629 $ 84,733 $ 73,411
$ 86,892 $ 71,425 $ 39,551
0.68% 0.71% 0.75%(b)
0.68% 0.71% 0.75%(b)
6.22% 6.67% 6.76%(b)
</TABLE>
See Notes to Financial Statements B-76
<PAGE>
Prudential Government Income Fund, Inc.
Report of Independent Accountants
To the Shareholders and Board of Directors of
Prudential Government Income Fund, Inc.
In our opinion, the accompanying statement of assets and liabilities,
including the portfolio of investments, and the related statements of operations
and of changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Prudential Government Income Fund,
Inc. (the 'Fund') at February 29, 2000, the results of its operations for the
year then ended, the changes in its net assets for each of the two years in the
period then ended, and the financial highlights for each of the three years in
the period then ended, in conformity with accounting principles generally
accepted in the United States. These financial statements and financial
highlights (hereafter referred to as 'financial statements') are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with auditing standards
generally accepted in the United States, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits, which included confirmation of securities at February
29, 2000 by correspondence with the custodian and brokers, provide a reasonable
basis for the opinion expressed above. The accompanying highlights for each of
the two periods ended February 28, 1997 were audited by other independent
accountants, whose opinion dated April 11, 1997 was unqualified.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York
April 14, 2000
B-77 See Notes to Financial Statements
<PAGE>
Prudential Government Income Fund, Inc.
Important Notice for Certain 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's taxing authorities. We are pleased to report
that 40% 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.
See Notes to Financial Statements B-78
<PAGE>
APPENDIX I--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
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
VALUE OF $1.00 INVESTED ON
1/1/1926 THROUGH 12/31/1999 SMALL STOCKS COMMON STOCKS LONG-TERM BONDS TREASURY BILLS INFLATION
<S> <C> <C> <C> <C> <C>
1926
1936
1946
1956
1966
1976
1986
1999 $6,640.79 $2,845.63 $40.22 $15.64 $9.40
</TABLE>
Source: Ibbotson Associates. Used with permission. All rights reserved. This
chart is for illustrative purposes only and is not indicative of the past,
present, or future performance of any asset class or any Prudential mutual fund.
Generally, stock returns are attributable to capital appreciation and the
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.
I-1
<PAGE>
Set forth below is historical performance data relating to various sectors
of the fixed-income securities markets. The chart shows the historical total
returns of U.S. Treasury bonds, U.S. mortgage securities, U.S. corporate bonds,
U.S. high yield bonds and world government bonds on an annual basis from 1989
through 1999. The total returns of the indices include accrued interest, plus
the price changes (gains or losses) of the underlying securities during the
period mentioned. The data is provided to illustrate the varying historical
total returns and investors should not consider this performance data as an
indication of the future performance of the Fund or of any sector in which the
Fund invests.
All information relies on data obtained from statistical services, reports
and other services believed by the Manager to be reliable. Such information has
not been verified. The figures do not reflect the operating expenses and fees of
a mutual fund. See "Risk/Return Summary--Fees and Expenses" in 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>
YEAR 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. GOVERNMENT
TREASURY
BONDS(1) 14.4% 8.5% 15.3% 7.2% 10.7% (3.4)% 18.4% 2.7% 9.6% 10.0% (2.56)%
- -----------------------------------------------------------------------------------------------------------------
U. S. GOVERNMENT
MORTGAGE
SECURITIES(2) 15.4% 10.7% 15.7% 7.0% 6.8% (1.6)% 16.8% 5.4% 9.5% 7.0% 1.86%
- -----------------------------------------------------------------------------------------------------------------
U.S. INVESTMENT GRADE
CORPORATE
BONDS(3) 14.1% 7.1% 18.5% 8.7% 12.2% (3.9)% 22.3% 3.3% 10.2% 8.6% (1.96)%
- -----------------------------------------------------------------------------------------------------------------
U.S.
HIGH YIELD
CORPORATE
BONDS(4) 0.8% (9.6)% 46.2% 15.8% 17.1% (1.0)% 19.2% 11.4% 12.8% 1.6% 2.39%
- -----------------------------------------------------------------------------------------------------------------
WORLD
GOVERNMENT
BONDS(5) (3.4)% 15.3% 16.2% 4.8% 15.1% 6.0% 19.6% 4.1% (4.3)% 5.3% (5.07)%
- -----------------------------------------------------------------------------------------------------------------
DIFFERENCE BETWEEN HIGHEST
AND LOWEST RETURN PERCENT 18.8% 24.9% 30.9% 11.0% 10.3% 9.9% 5.5% 8.7% 17.1% 8.4% 7.46%
</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. Source: Lipper Inc.
(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 SMITH BARNEY 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.
I-2
<PAGE>
This chart below shows the historical volatility of general interest rates
as measured by the long U.S. Treasury Bond.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
LONG TERM U.S. TREASURY BOND YIELD IN PERCENT (1926-1999)
1926
1936
1946
1956
1966
1976
1986
1996
1999
YEAR-END
- -------
Source: Ibbotson Associates. Used with permission. All rights reserved. The
chart illustrates the historical yield of the long-term U.S. Treasury Bond from
1926-1999. 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.
This chart illustrates the performance of major world stock markets for the
period from December 31, 1985 through December 31,1999. It does not represent
the performance of any Prudential mutual fund.
AVERAGE ANNUAL TOTAL RETURNS OF MAJOR WORLD STOCK MARKETS
(12/31/1985 - 12/31/1999) (IN U.S. DOLLARS)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Sweden 22.70%
Hong Kong 20.37%
Spain 20.11%
Netherland 18.63%
Belgium 18.41%
France 17.69%
USA 17.39%
UK 16.41%
Europe 16.28%
Switzerland 15.58%
Sing/Mlysia 15.07%
Denmark 14.72%
Germany 13.29%
Australia 11.68%
Italy 11.39%
Canada 11.10%
Japan 9.59%
Norway 8.91%
Austria 7.09%
</TABLE>
- -------
Source: Morgan Stanley Capital International (MSCI) and Lipper Inc. as of
12/31/99. Used with permission. Morgan Stanley Country indexes are unmanaged
indexes which include those stocks making up the largest two-thirds of each
country's total stock market capitalization. Returns reflect the reinvestment of
all distributions. This chart is for illustrative purposes only and is not
indicative of the past, present or future performance of any specific
investment. Investors cannot invest directly in stock indexes.
I-3
<PAGE>
This chart shows the growth of a hypothetical $10,000 investment made in the
stocks representing the S&P 500 Stock Index with and without reinvested
dividends.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
CAPITAL APPRECIATION CAPITAL APPRECIATION ONLY
AND REINVESTING DIVIDENDS
<S> <C> <C>
1969
1973
1977
1981
1985
1989
1993
1997
1999 $474,094 $159,597
</TABLE>
- -------
Source: Lipper Inc. Used with permission. All rights reserved. The chart is used
for illustrative purposes only and is not intended to represent the past,
present or future performance of any Prudential mutual fund. Common stock total
return is based on the Standard & Poor's 500 Composite Stock Price Index, a
market-value-weighted index made up of 500 of the largest stocks in the U.S.
based upon their stock market value. Investors cannot invest directly in
indexes.
WORLD STOCK MARKET CAPITALIZATION BY REGION
WORLD TOTAL: 20.7 TRILLION
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Canada 2.1%
Europe 32.5%
U.S. 49.0%
Pacific Basin 16.4%
</TABLE>
- -------
Source: Morgan Stanley Capital International, December 31, 1999. Used with
permission. This chart represents the capitalization of major world stock
markets as measured by the Morgan Stanley Capital International (MSCI) World
Index. The total market capitalization is based on the value of approximately
1577 companies in 22 countries (representing approximately 60% of the aggregate
market value of the stock exchanges). This chart is for illustrative purposes
and does not represent the allocation of any Prudential mutual fund.
I-4
<PAGE>
APPENDIX II--GENERAL INVESTMENT INFORMATION
The following terms are used in mutual fund investing.
ASSET ALLOCATION
Asset allocation is a technique for reducing risk and providing balance.
Asset allocation among different types of securities within an overall
investment portfolio helps to reduce risk and to potentially provide stable
returns, while enabling investors to work toward their financial goal(s). Asset
allocation is also a strategy to gain exposure to better performing asset
classes while maintaining investment in other asset classes.
DIVERSIFICATION
Diversification is a time-honored technique for reducing risk, providing
"balance" to an overall portfolio and potentially achieving more stable returns.
Owning a portfolio of securities mitigates the individual risks (and returns) of
any one security. Additionally, diversification among types of securities
reduces the risks (and general returns) of any one type of security.
DURATION
Debt securities have varying levels of sensitivity to interest rates. As
interest rates fluctuate, the value of a bond (or a bond portfolio) will
increase or decrease. Longer-term bonds are generally more sensitive to changes
in interest rates. When interest rates fall, bond prices generally rise.
Conversely, when interest rates rise, bond prices generally fall.
Duration is an approximation of the price sensitivity of a bond (or a bond
portfolio) to interest rate changes. It measures the weighted average maturity
of a bond's (or a bond portfolio's) cash flows, I.E., principal and interest
rate payments. Duration is expressed as a measure of time in years--the longer
the duration of a bond (or a bond portfolio), the greater the impact of interest
rate changes on the bond's (or the bond portfolio's) price. Duration differs
from effective maturity in that duration takes into account call provisions,
coupon rates and other factors. Duration measures interest rate risk only and
not other risks such as credit risk and, in the case of non-U.S. dollar
denominated securities, currency risk. Effective maturity measures the final
maturity dates of a bond (or a bond portfolio).
MARKET TIMING
Market timing--buying securities when prices are low and selling them when
prices are relatively higher may not work for many investors because it is
impossible to predict with certainty how the price of a security will fluctuate.
However, owning a security for a long period of time may help investors 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.
STANDARD DEVIATION
Standard deviation is an absolute (non-relative) measure of volatility
which, for a mutual fund, depicts how widely the returns varied over a certain
period of time. When a fund has a high standard deviation, its range of
performance has been very wide, implying greater volatility potential. Standard
deviation is only one of several measures of a fund's volatility.
II-1
<PAGE>
PART C
OTHER INFORMATION
ITEM 23. EXHIBITS.
<TABLE>
<S> <C>
(a) (1) Articles of Restatement. Incorporated by reference to Exhibit 1
to Post-Effective Amendment No. 22 to Registration Statement on
Form N-1A (File No. 2-82976) filed via EDGAR on April 30, 1996.
(2) Articles Supplementary. Incorporated by reference to Exhibit
(a)(3) to Post-Effective Amendment No. 27 to the Registration
Statement on Form N-1A (File No. 2-82976) filed via EDGAR on May 14,
1999.
(b) Amended and Restated By-laws of the Registrant.*
(c) 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 on May 5, 1994.
(d) (1) Management Agreement dated as of July 1,1988 between the
Registrant and Prudential Mutual Fund Management, Inc. Incorporated
by reference to Exhibit 5(a) to Post-Effective Amendment No. 24 to
the Registration Statement on Form N-1A (File No. 2-82976) filed via
EDGAR on May 2, 1997.
(2) Subadvisory Agreement dated as of July 1,1988 between Prudential
Mutual Fund Management, Inc. and The Prudential Investment
Corporation. Incorporated by reference to Exhibit 5(b) to
Post-Effective Amendment No. 24 to the Registration Statement on Form
N-1A (File No. 2-82976) filed via EDGAR on May 2, 1997.
(3) Amendment to Subadvisory Agreement dated as of November 18, 1999,
between Prudential Investments Fund Management LLC and The Prudential
Investment Corporation.*
(e) (1) Distribution Agreement dated as of June 1, 1998 with Prudential
Investment Management Services LLC. Incorporated by reference to
Exhibit 7(b) to the Registration Statement on Form N-14 (File
No. 333-64907) filed via EDGAR on October 30, 1998.
(2) Selected Dealer Agreement. Incorporated by reference to
Exhibit 7(a) to the Registration Statement on Form N-14 (File No.
333-64907) filed via EDGAR on October 30, 1998.
(g) (1) Revised Custodian Agreement between the Registrant and State
Street Bank and Trust Company. Incorporated by reference to Exhibit
8(a) to Post-Effective Amendment No. 24 to the Registration Statement
on Form N-1A (File No. 2-82976) filed via EDGAR on May 2, 1997.
(2) Special Custody Agreement among the Registrant, State Street Bank
and Trust Company, and Goldman, Sachs & Co. Incorporated by reference
to Exhibit 8(b) to Post-Effective Amendment No. 24 to the
Registration Statement on Form N-1A (File No. 2-82976) filed via
EDGAR on May 2, 1997.
(3) Customer Agreement between the Registrant and Goldman, Sachs &
Co. Incorporated by reference to Exhibit 8(c) to Post-Effective
Amendment No. 24 to the Registration Statement on Form N-1A (File
No. 2-82976) filed via EDGAR on May 2, 1997.
(4) Form of Amendment to Revised Custodian Agreement. Incorporated by
reference to Exhibit 8(d) to Post-Effective Amendment No. 19 to the
Registration Statement on Form N-1A (File No. 2-82976) filed via
EDGAR on November 3, 1995.
(5) Amendment to Custodian Contract/Agreement dated as of
February 22, 1999 by and between the Registrant and State Street Bank
and Trust Company.*
(h) (1) Transfer Agency Agreement dated as of January 1, 1988 between the
Registrant and Prudential Mutual Fund Services, Inc. Incorporated by
reference to Exhibit 9 to Post-Effective Amendment No. 24 to the
Registration Statement on Form N-1A (File No. 2-82976) filed via
EDGAR on May 2, 1997.
(2) Amendment to Transfer Agency and Service Agreement dated as of
August 24, 1999 by and between the Registrant and Prudential Mutual
Fund Services LLC (successor to Prudential Mutual Fund Services,
Inc.).*
</TABLE>
C-1
<PAGE>
<TABLE>
<S> <C>
(i) (1) Opinion of Counsel. Incorporated by reference to Exhibit (i) to
Post-Effective Amendment No. 27 to the Registration Statement on Form
N-1A (File No. 2-82976) filed via EDGAR on May 14, 1999.
(2) Consent of Counsel.*
(j) Consent of Independent Accountants.*
(l) Purchase Agreement. Incorporated by reference to Exhibit 13 to
Post-Effective Amendment No. 24 to the Registration Statement on Form
N-1A (File No. 2-82976) filed via EDGAR on May 2, 1997.
(m) (1) Amended and Restated Distribution and Service Plan for Class A
shares. Incorporated by reference to Exhibit 15(a) to the
Registration Statement on Form N-14 (File No. 333-64907) filed via
EDGAR on October 30, 1998.
(2) Amended and Restated Distribution and Service Plan for Class B
shares. Incorporated by reference to Exhibit 15(b) to the
Registration Statement on Form N-14 (File No. 333-64907) filed via
EDGAR on October 30, 1998.
(3) Amended and Restated Distribution and Service Plan for Class C
shares. Incorporated by reference to Exhibit 15(c) to the
Registration Statement on Form N-14 (File No. 333-64907) filed via
EDGAR on October 30, 1998.
(n) Amended Rule 18f-3 Plan. Incorporated by reference to Exhibit (o) to
Post-Effective Amendment No. 27 to the Registration Statement on Form
N-1A (File No. 2-82976) filed via EDGAR on May 14, 1999.
(p) (1) Code of Ethics of Registrant.*
(2) Code of Ethics of The Prudential Investment Corporation,
Prudential Investments Fund Management LLC and Prudential Investment
Management Services LLC.*
</TABLE>
- ------------------------
*Filed herewith.
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
None.
ITEM 25. INDEMNIFICATION.
As permitted by Section 17(h) and (i) of the Investment Company Act of 1940,
as amended (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, as amended (Securities Act), may be permitted to directors, officers
and controlling persons of the Registrant pursuant to foregoing provisions or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission (the Commission) such indemnification is against public
policy as expressed in the 1940 Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in connection with the successful defense
of any action, suit or proceeding) is asserted against the Registrant by such
director, officer or controlling person in connection with the shares being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the 1940 Act and will be governed by the final
adjudication of such issue.
C-2
<PAGE>
The Registrant has purchased an insurance policy insuring its officers and
directors against liabilities, and certain costs of defending claims against
such officers and directors, to the extent such officers and directors are not
found to have committed conduct constituting willful misfeasance, bad faith,
gross negligence or reckless disregard in the performance of their duties. The
insurance policy also insures the Registrant against the cost of indemnification
payments to officers and directors under certain circumstances.
Section 9 of the Management Agreement (Exhibit 5(a) to the Registration
Statement) and Section 4 of the Subadvisory Agreement (Exhibit 5(b) to the
Registration Statement) limit the liability of Prudential Investments Fund
Management LLC (PIFM) and The Prudential Investment Corporation (PIC),
respectively, to liabilities arising from willful misfeasance, bad faith or
gross negligence in the performance of their respective duties or from reckless
disregard by them of their respective obligations and duties under the
agreements.
The Registrant hereby undertakes that it will apply the indemnification
provisions of its By-Laws and the Distribution Agreement in a manner consistent
with Release No. 11330 of the 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 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
(a) Prudential Investments Fund Management LLC (PIFM)
See "How the Fund is Managed--Manager" in the Prospectus constituting
Part A of this Registration Statement and "Investment Advisory and Other
Services" in the Statement of Additional Information constituting Part B of this
Registration Statement.
The business and other connections of the officers of PIFM are listed in
Schedules A and D of Form ADV of PIFM as currently on file with the Commission,
the text of which is hereby incorporated by reference (File No. 801-31104).
The business and other connections of PIFM's directors and principal
executive officers are set forth below. Except as otherwise indicated, the
address of each person is Gateway Center Three, 100 Mulberry Street, Newark, NJ
07102-4077.
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH PIFM PRINCIPAL OCCUPATIONS
- ---------------- -------------------- ---------------------
<S> <C> <C>
David R. Odenath, Jr. Officer in Charge, Officer in Charge, President, Chief Executive Officer and
President, Chief Chief Operating Officer, PIFM; Senior Vice President, The
Executive Officer Prudential Insurance Company of America (Prudential)
and Chief Operating
Officer
Robert F. Gunia Executive Vice Executive Vice President and Chief Administrative Officer,
President and Chief PIFM; Vice President, Prudential; President, Prudential
Administrative Investment Management Services LLC (PIMS)
Officer
William V. Healey Executive Vice Executive Vice President, Chief Legal Officer and Secretary,
President, Chief PIFM; Vice President and Associate General Counsel,
Legal Officer and Prudential; Senior Vice President, Chief Legal Officer and
Secretary Secretary, PIMS
Brian W. Henderson Executive Vice Executive Vice President, PIFM; Senior Vice President and
President Chief Operating Officer, PIMS
Stephen Pelletier Executive Vice Executive Vice President, PIFM
President
Judy A. Rice Executive Vice Executive Vice President, PIFM
President
Lynn M. Waldvogel Executive Vice Executive Vice President, PIFM
President
</TABLE>
(b) The Prudential Investment Corporation (PIC)
See "How the Fund is Managed--Manager" in the Prospectus constituting
Part A of this Registration Statement and "Investment Advisory and Other
Services" in the Statement of Additional Information constituting Part B of this
Registration Statement.
C-3
<PAGE>
The business and other connections of PIC's directors and executive officers
are as set forth below. Except as otherwise indicated, the address of each
person is Gateway Center Three, Newark, NJ 07101.
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH PIC PRINCIPAL OCCUPATIONS
- ---------------- -------------------- ---------------------
<S> <C> <C>
Jeffrey Hiller Chief Compliance Chief Compliance Officer, Prudential Global Asset Management
Officer
John R. Strangfeld, Jr. Chairman of the President of Prudential Global Asset Management Group of
Board, President, Prudential; Senior Vice President, Prudential; Chairman of
Chief Executive the Board, President, Chief Executive Officer and Director,
Officer and Director PIC
Bernard Winograd Senior Vice Chief Executive Officer, Prudential Real Estate Investors;
President and Senior Vice President and Director, PIC
Director
</TABLE>
ITEM 27. PRINCIPAL UNDERWRITERS.
(a) Prudential Investment Management Services LLC (PIMS)
PIMS is distributor for the following open-end management companies: Cash
Accumulation Trust, COMMAND Money Fund, COMMAND Government Fund, COMMAND
Tax-Free Fund, Global Utility Fund, Inc., Nicholas-Applegate Fund, Inc.
(Nicholas-Applegate Growth Equity Fund), Prudential Balanced Fund, Prudential
California Municipal Fund, Prudential Diversified Bond Fund, Inc., Prudential
Diversified Funds, Prudential Emerging Growth Fund, Inc., Prudential Equity
Fund, Inc., Prudential Equity Income Fund, Prudential Europe Growth Fund, Inc.,
Prudential Global Genisis Fund, Inc., Prudential Global Total Return Fund, Inc.,
Prudential Government Income Fund, Inc., Prudential Government Securities Trust,
Prudential High Yield Fund, Inc., Prudential High Yield Total Return Fund, Inc.,
Prudential Index Series Fund, Prudential Institutional Liquidity Portfolio,
Inc., Prudential International Bond Fund, Inc., Prudential Mid-Cap Value Fund,
Prudential MoneyMart Assets, Inc., Prudential Municipal Bond Fund, Prudential
Municipal Series Fund, Prudential National Municipals Fund, Inc., Prudential
National Resources Fund, Inc., Prudential Pacific Growth Fund, Inc., Prudential
Real Estate Securities Fund, Prudential Sector Funds, Inc., Prudential Small-Cap
Quantum Fund, Inc., Prudential Small Company Value Fund, Inc., Prudential
Special Money Market Fund, Inc., Prudential Short-Term Corporate Bond Fund,
Inc., Prudential 20/20 Focus Fund, Prudential Tax-Free Money Fund, Inc.,
Prudential Tax-Managed Funds, Prudential World Fund, Inc., The Prudential
Investment Portfolios, Inc., Strategic Partners Series Target Funds and The
Target Portfolio Trust.
PIMS is also distributor of the following unit investment trusts: Separate
Accounts: Prudential's Gibraltar Fund, Inc., The Prudential Variable Contract
Account-2, The Prudential Variable Contract Account-10, The Prudential Variable
Contract Account-11, The Prudential Variable Contract Account-24, The Prudential
Variable Contract GI-2, The Prudential Discovery Select Group Variable Contract
Account, The Pruco Life Flexible Premium Variable Annuity Account, The
Prudential Individual Variable Contract Account and The Prudential Qualified
Individual Variable Contract Account.
(b) Information concerning the directors and officers of PIMS is set forth
below.
<TABLE>
<CAPTION>
POSITIONS AND POSITIONS AND
OFFICES WITH OFFICES WITH
NAME(1) UNDERWRITER REGISTRANT
- ------- ------------- -------------
<S> <C> <C>
Margaret Deverell................... Vice President and Chief Financial Officer None
Robert F. Gunia..................... President Vice President and Director
Kevin Frawley....................... Senior Vice President and Compliance Officer None
213 Washington Street
Newark, NJ 07102
William V. Healey................... Senior Vice President, Secretary and Chief Legal Officer None
Brian W. Henderson.................. Senior Vice President and Officer None
John R. Strangfeld, Jr.............. Advisory Board Member President and Director
</TABLE>
- ------------------------
(1) The address of each person named is 751 Broad Street, Newark NJ 07102-4077
unless otherwise indicated.
(c) Registrant has no principal underwriter who is not an affiliated person
of the Registrant.
C-4
<PAGE>
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS.
All accounts, books and other documents required to be maintained by
Section 31(a) of the 1940 Act and the Rules thereunder are maintained at the
offices of State Street Bank and Trust Company, One Heritage Drive, North
Quincy, Massachusetts 02171, the Registrant, Gateway Center Three, 100 Mulberry
Street, Newark, New Jersey 07102-4077, and Prudential Mutual Fund Services LLC,
194 Wood Avenue South, Iselin, New Jersey 08830. Documents required by
Rules 31a-1(b)(5), (6), (7), (9), (10) and (11) and 31a-1(f) and
Rules 31a-1(b)(4) and (11) and 31a-1(d) will be kept at Gateway Center Three,
100 Mulberry Street, Newark, New Jersey 07102-4077 and the remaining accounts,
books and other documents required by such other pertinent provisions of
Section 31(a) and the Rules promulgated thereunder will be kept by State Street
Bank and Trust Company and Prudential Mutual Fund Services LLC.
ITEM 29. MANAGEMENT SERVICES.
Other than as set forth under the captions "How the Fund is
Managed--Manager," "--Investment Adviser" and "--Distributor" in the Prospectus
and the captions "Investment Advisory and Other Services--Manager and Investment
Adviser" and "--Principal Underwriter, Distributor and Rule 12b-1 Plans" in the
Statement of Additional Information, constituting Parts A and B, respectively,
of this Post-Effective Amendment to the Registration Statement, Registrant is
not a party to any management-related service contract.
ITEM 30. UNDERTAKINGS.
Registrant makes the following undertaking:
(a) To furnish each person to whom a prospectus is delivered with a copy of
the Fund's latest annual report upon request and without charge.
C-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended (the
"1933 Act"), and the Investment Company Act of 1940, as amended (the "1940
Act"), the Registrant certifies that it meets all of the requirements for
effectiveness of this Post-Effective Amendment No. 28 to the Registration
Statement under Rule 485(b) under the 1933 Act and has duly caused this Post-
Effective Amendment No. 28 to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Newark, and
State of New Jersey, on the 28 day of April, 2000.
PRUDENTIAL GOVERNMENT INCOME FUND,
INC.
/s/ John R. Strangfeld, Jr.
------------------------------------------------------------------
JOHN R. STRANGFELD, JR., PRESIDENT
Pursuant to the requirements of the 1933 Act, this Post-Effective Amendment
No. 28 to the Registrant's Registration Statement has been signed below by the
following persons in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Eugene C. Dorsey Director April 28, 2000
- ------------------------------------
EUGENE C. DORSEY
/s/ Delayne Dedrick Gold Director April 28, 2000
- ------------------------------------
DELAYNE DEDRICK GOLD
/s/ Robert F. Gunia Vice President and Director April 28, 2000
- ------------------------------------
ROBERT F. GUNIA
/s/ Thomas T. Mooney Director April 28, 2000
- ------------------------------------
THOMAS T. MOONEY
/s/ Stephen P. Munn Director April 28, 2000
- ------------------------------------
STEPHEN P. MUNN
/s/ David R. Odenath, Jr. Vice President and Director April 28, 2000
- ------------------------------------
DAVID R. ODENATH, JR.
/s/ Richard A. Redeker Director April 28, 2000
- ------------------------------------
RICHARD A. REDEKER
/s/ John R. Strangfeld, Jr. President and Director April 28, 2000
- ------------------------------------
JOHN R. STRANGFELD, JR.
/s/ Nancy Hays Teeters Director April 28, 2000
- ------------------------------------
NANCY HAYS TEETERS
/s/ Louis A. Weil, III Director April 28, 2000
- ------------------------------------
LOUIS A. WEIL, III
/s/ Grace C. Torres Treasurer and Principal Financial April 28, 2000
- ------------------------------------ and Accounting Officer
GRACE C. TORRES
</TABLE>
<PAGE>
EXHIBIT INDEX
<TABLE>
<S> <C>
(b) Amended and Restated By-Laws of the Registrant.
(d)(3) Amendment to Subadvisory Agreement dated as of November 18, 1999,
between Prudential Investments Fund Management LLC and The
Prudential Investment Corporation.
(g)(5) Amendment to Custodian Contract/Agreement dated as of
February 22, 1999 by and between the Registrant and State Street
Bank and Trust Company.
(h)(2) Amendment to Transfer Agency and Service Agreement dated as of
August 24, 1999 by and between the Registrant and Prudential
Mutual Fund Services LLC (successor to Prudential Mutual Fund
Services, Inc.).
(i)(2) Consent of Counsel.
(j) Consent of Independent Accountants.
(p)(1) Code of Ethics of Registrant.
(2) Code of Ethics of The Prudential Investment Corporation,
Prudential Investments Fund Management LLC and Prudential
Investment Management Services LLC.
</TABLE>
<PAGE>
EXHIBIT (b)
PRUDENTIAL GOVERNMENT INCOME FUND, INC.
By-Laws
Amended and Restated as of February 29, 2000
ARTICLE I
STOCKHOLDERS
Section 1. PLACE OF MEETING. All meetings of the stockholders shall be held
at the principal office of the Corporation in the State of Maryland or at such
other place within the United States as may from time to time be designated by
the Board of Directors and stated in the notice of such meeting.
Section 2. ANNUAL MEETING. The annual meeting of the stockholders of the
Corporation shall be held in the month of June of each year on such date and at
such hour as may from to time be designated by the Board of Directors and stated
in the notice of such meeting, for the transaction of such business as may
properly be brought before the meeting; provided, however, that an annual
meeting of stockholders is not required to be held in any year in which the
election of directors is not required to be acted upon by stockholders pursuant
to the Investment Company Act of 1940.
Section 3. SPECIAL OR EXTRAORDINARY MEETINGS. Special or extraordinary
meetings of the stockholders for any purpose or purposes may be called by the
Chairman of the Board, the President or a majority of the Board of Directors,
and shall be called by the Secretary upon receipt of the request in writing
signed by
<PAGE>
stockholders holding not less than 25% of the common stock issued and
outstanding and entitled to vote thereat. Such request shall state the purpose
or purposes of the proposed meeting. The Secretary shall inform such
stockholders of the reasonably estimated costs of preparing and mailing such
notice of meeting and upon payment to the Corporation of such costs, the
Secretary shall give notice stating the purpose or purposes of the meeting as
required in this Article and by-law to all stockholders entitled to notice of
such meeting. No special meeting need be called upon the request of the holders
of shares entitled to cast less than a majority of all votes entitled to be cast
at such meeting to consider any matter which is substantially the same as a
matter voted upon at any special meeting of stockholders held during the
preceding twelve months.
Section 4. NOTICE OF MEETINGS OF STOCKHOLDERS. Not less than ten days' and
not more than ninety days written or printed notice of every meeting of
stockholders, stating the time and place thereof (and the general nature of the
business proposed to be transacted at any special or extraordinary meeting),
shall be given to each stockholder entitled to vote thereat by leaving the same
with such stockholder or at such stockholder's residence or usual place of
business or by mailing it, postage prepaid, and addressed to such stockholder at
his address as it appears upon the books of the Corporation. If mailed, notice
shall be deemed to be given when deposited in the United States mail addressed
to the stockholder as aforesaid.
No notice of the time, place or purpose of any meeting of stockholders need
be given to any stockholder who attends in person or by proxy or to any
stockholder who, in writing executed and filed with the records of the meeting,
either before or after the holder thereof, waives such notice.
<PAGE>
Section 5. RECORD DATES. The Board of Directors may fix, in advance, a date
not exceeding ninety days preceding the date of any meeting of stockholders, any
dividend payment date or any date for the allotment of rights, as a record date
for the determination of the stockholders entitled to notice of and to vote at
such meeting or entitled to receive such dividends or rights, as the case may
be; and only stockholders of record on such date shall be entitled to notice of
and to vote at such meeting or to receive such dividends or rights, as the case
may be. In the case of a meeting of stockholders, such date shall not be less
than ten days prior to the date fixed for such meeting.
Section 6. QUORUM, ADJOURNMENT OF MEETINGS. The presence in person or by
proxy of the holders of record of a majority of the shares of the common stock
of the Corporation issued and outstanding and entitled to vote thereat shall
constitute a quorum at all meetings of the stockholders except as otherwise
provided in the Articles of Incorporation. If, however, such quorum shall not be
present or represented at any meeting of the stockholders, the holders of a
majority of the stock present in person or by proxy shall have power to adjourn
the meeting from time to time, without notice other than announcement at the
meeting, until the requisite number of stock entitled to vote at such meeting
shall be present. At such adjourned meeting at which the requisite amount of
stock entitled to vote thereat shall be represented any business may be
transacted which might have been transacted at the meeting as originally
notified.
Section 7. VOTING AND INSPECTORS. At all meetings, stockholders of record
entitled to vote thereat shall have one vote for each share of common stock
standing in his/her name on the books of the Corporation (and such
<PAGE>
stockholders of record holding fractional shares, if any, shall have
proportionate voting rights) on the date for the determination of stockholders
entitled to vote at such meeting, either in person or by proxy. A stockholder
may sign a writing authorizing another person to act as proxy. Signing may be
accomplished by the stockholder or the stockholder's authorized agent signing
the writing or causing the stockholder's signature to be affixed to the writing
by any reasonable means, including facsimile signature. A stockholder may
authorize another person to act as proxy by transmitting, or authorizing the
transmission of, a telegram, cablegram, datagram, or other means of electronic
transmission to the person authorized to act as proxy or to a proxy solicitation
firm, proxy support service organization, or other person authorized by the
person who will act as proxy to receive the transmission.
All elections shall be had and all questions decided by a majority of the
votes cast at a duly constituted meeting, except as otherwise provided by
statute or by the Articles of Incorporation or by these By-Laws.
At any election of Directors, the Chairman of the meeting may, and upon the
request of the holders of ten percent (10%) of the stock entitled to vote at
such election shall, appoint two inspectors of election who shall first
subscribe an oath or affirmation to execute faithfully the duties of inspectors
at such election with strict impartiality and according to the best of their
ability, and shall after the election make a certificate of the result of the
vote taken. No candidate for the office of Direct or shall be appointed such
Inspector.
Section 8. CONDUCT OF STOCKHOLDERS' MEETINGS. The meetings of the
stockholders shall be presided over by the Chairman of the Board, or if he is
not
<PAGE>
present, by the President, or if he is not present, by a Vice President, or
if none of them is present, by a Chairman to be elected at the meeting. The
Secretary of the Corporation, if present, shall act as a Secretary of such
meetings, or if he is not present, an Assistant Secretary shall so act; if
neither the Secretary nor the Assistant Secretary is present, then the meeting
shall elect its Secretary.
Section 9. CONCERNING VALIDITY OF PROXIES, BALLOTS, ETC. At every meeting
of the stockholders, all proxies shall be received and taken in charge of and
all ballots shall be received and canvassed by the Secretary of the meeting, who
shall decide all questions concerning the qualification of voters, the validity
of the proxies and the acceptance or rejection of votes, unless inspectors of
election shall have been appointed by the Chairman of the meeting, in which
event such inspectors of election shall decide all such questions.
ARTICLE II
BOARD OF DIRECTORS
Section 1. NUMBER AND TENURE OF OFFICE. The business and affairs of the
Corporation shall be conducted and managed by a Board of Directors of not less
than three nor more than twelve Directors, as may be determined from time to
time by vote of a majority of the Directors then in office, provided that if
there is no stock outstanding the number of Directors may be less than three but
not less than one. Directors need not be stockholders.
Section 2. VACANCIES. In case of any vacancy in the Board of Directors
through death, resignation or other cause, other than an increase in the number
of
<PAGE>
Directors, a majority of the remaining Directors, although a majority, is
less than a quorum by an affirmative vote, may elect a successor to hold office
until the next annual meeting of stockholders or until his successor is chosen
and qualifies.
Section 3. INCREASE OR DECREASE IN NUMBER OF DIRECTORS. The Board of
Directors, by the vote of a majority of the entire Board, may increase the
number of Directors and may elect Directors to fill the vacancies created by any
such increase in the number of Directors until the next annual meeting or until
their successors are duly chosen and qualified. The Board of Directors, by the
vote of a majority of the entire Board, may likewise decrease the number of
Directors to a number not less than three.
Section 4. PLACE OF MEETING. The Directors may hold their meetings, have
one or more offices, and keep the books of the Corporation, outside the State of
Maryland, at any office or offices of the Corporation or at any other place as
they may from time to time by resolution determine, or in the case of meetings,
as they may from time to time by resolution determine or as shall be specified
or fixed in the respective notices or waivers of notice thereof.
Section 5. REGULAR MEETINGS. Regular meetings of the Board of Directors
shall be held at such time and on such notice as the Directors may from time to
time determine.
The annual meeting of the Board of Directors shall be held as soon as
practicable after the annual meeting of the stockholders for the election of
Directors.
<PAGE>
Section 6. SPECIAL MEETINGS. Special meetings of the Board of Directors may
be held from time to time upon call of the Chairman of the Board, the President,
the Secretary or two or more of the Directors, by oral or telegraphic or written
notice duly served on or sent or mailed to each Director not less than one day
before such meeting. No notice need be given to any Director who attends in
person or to any Director who, in writing executed and filed with the records of
the meeting either before or after the holding thereof, waives such notice. Such
notice or waiver of notice need not state the purpose or purposes of such
meeting.
Section 7. QUORUM. One-third of the Directors then in office shall
constitute a quorum for the transaction of business, provided that a quorum
shall in no case be less than two Directors. If at any meeting of the Board
there shall be less than a quorum present, a majority of those present may
adjourn the meeting from time to time until a quorum shall be obtained. The act
of the majority of the Directors present at any meeting at which there is a
quorum shall be the act of the Directors, except as may be otherwise
specifically provided by statute or by the Articles of Incorporation or by these
By-Laws.
Section 8. EXECUTIVE COMMITTEE. The Board of Directors may, by the
affirmative vote of a majority of the entire Board, appoint from the Directors
an Executive Committee to consist of such number of Directors (not less than
three) as the Board may from time to time determine. The Chairman of the
Committee shall be elected by the Board of Directors. The Board of Directors by
such affirmative vote shall have power at any time to change the members of such
Committee and may fill vacancies in the Committee by election from the
<PAGE>
Directors. When the Board of Directors is not in session, to the extent
permitted by law the Executive Committee shall have and may exercise any or all
of the powers of the Board of Directors in the management of the business arid
affairs of the Corporation. The Executive Committee may fix its own rules of
procedure, and may meet when and as provided by such rules or by resolution of
the Board of Directors, but in every case the presence of a majority shall be
necessary to constitute a quorum. During the absence of a member of the
Executive Committee, the remaining members may appoint a member of the Board of
Directors to act in his place.
Section 9. OTHER COMMITTEES. The Board of Directors, by the affirmative
vote of a majority of the whole Board, may appoint from the Directors other
committees which shall in each case consist of such number of Directors (not
less than two) and shall have and may exercise such powers as the Board may
determine in the resolution appointing them. A majority of all the members of
any such committee may determine its action and fix the time and place of its
meetings, unless the Board of Directors shall otherwise provide. The Board of
Directors shall have power at any time to change the members and powers of any
such committee, to fill vacancies and to discharge any such committee.
Section 10. TELEPHONE MEETINGS. Members of the Board of Directors or a
committee of the Board of Directors may participate in a meeting by means of a
conference telephone or similar communications equipment if all persons
participating in the meeting can hear each other at the same time. Participation
in a meeting by these means constitutes presence in person at the meeting.
<PAGE>
Section 11. ACTION WITHOUT A MEETING. Any action required or permitted to
be taken at any meeting of the Board of Directors or any committee thereof may
be taken without a meeting, if a written consent to such action is signed by all
members of the Board or of such committee, as the case may be, and such written
consent is filed with the minutes of the proceedings of the Board or committee.
Section 12. COMPENSATION OF DIRECTORS. No Director shall receive any stated
salary or fees from the Corporation for his services as such if such Director
is, otherwise than by reason of being such Director, an interested person (as
such term is defined by the Investment Company Act of 1940) of the Corporation
or of its investment adviser, administrator or principal underwriter. Except as
provided in the preceding sentence, Directors shall be entitled to receive such
compensation from the Corporation for their services as may from time to time be
voted by the Board of Directors.
Section 13. NOMINATING COMMITTEE. The Board of Directors may by the
affirmative vote of a majority of the entire Board appoint from its members a
Nominating Committee composed of two or more directors who are not "interested
persons" (as defined in the Investment Company Act of 1940) of the Corporation,
as the Board may from time to time determine. The Nominating Committee shall be
empowered to elect its own chairman who may call, or direct the Secretary of the
Corporation to call meetings in accordance with the notice provisions of these
By-Laws otherwise applicable to meetings of the Board of Directors. The
Nominating Committee shall recommend to the Board a slate of persons who are not
"interested persons" (as defined in the Investment Company Act of 1940) of the
Corporation, which may include members of the
<PAGE>
Nominating Committee, to be nominated for election as directors by the
stockholders at each annual meeting of stockholders and to fill any vacancy
occurring for any reason among the directors who are not such "interested
persons."
ARTICLE III
OFFICERS
Section 1. EXECUTIVE OFFICERS. The executive officers of the Corporation
shall be chosen by the Board of Directors as soon as may be practicable after
the annual meeting of the stockholders. These may include a Chairman of the
Board of Directors (who shall be a Director) and shall include a President (who
shall be a Director), one or more Vice Presidents (the number thereof to be
determined by the Board of Directors), a Secretary and a Treasurer. The Board of
Directors or the Executive Committee may also in its discretion appoint
Assistant Secretaries, Assistant Treasurers and other officers, agents and
employees, who shall have such authority and perform such duties as the Board or
the Executive Committee may determine. The Board of Directors may fill any
vacancy which may occur in any office. Any two officers, except those of
President and Vice President, may be held by the same person, but no officer
shall execute, acknowledge or verify any instrument in more than one capacity,
if such instrument is required by law or these By-Laws to be executed,
acknowledged or verified by two or more officers.
Section 2. TERM OF OFFICE. The term of office of all officers shall be one
year and until their respective successors are chosen and qualified. Any officer
<PAGE>
may be removed from office at any time with or without cause by the vote of a
majority of the whole Board of Directors.
Section 3. POWERS AND DUTIES. The officers of the Corporation shall have
such powers and duties as generally pertain to their respective offices, as well
as such powers and duties as may from time to time be conferred by the Board of
Directors or the Executive Committee.
ARTICLE IV
CAPITAL STOCK
Section 1. CERTIFICATES FOR SHARES. Each stockholder of the Corporation
shall be entitled to a certificate or certificates for the full shares of stock
of the Corporation owned by him in such form as the Board may from time to time
prescribe.
Section 2. TRANSFER OF SHARES. Shares of the Corporation shall be
transferable on the books of the Corporation by the holder thereof in person or
by his duly authorized attorney or legal representative, upon surrender and
cancellation of certificates, if any, for the same number of shares, duly
endorsed or accompanied by proper instruments of assignment and transfer, with
such proof of the authenticity of the signature as the Corporation or its agents
may reasonably require; in the case of shares not represented by certificates,
the same or similar requirements may be imposed by the Board of Directors.
Section 3. STOCK LEDGERS. The stock ledgers of the Corporation, containing
the names and addresses of the stockholders and the number of
<PAGE>
shares held by them respectively, shall be kept at the principal office of the
Corporation or, if the Corporation employs a Transfer Agent, at the offices of
the Transfer Agent of the Corporation.
Section 4. LOST, STOLEN OR DESTROYED CERTIFICATES. The Board of Directors
or the Executive Committee may determine the conditions upon which a new
certificate of stock of the Corporation of any class may be issued in place of a
certificate which is alleged to have been lost, stolen or destroyed; and may, in
its discretion, require the owner of such certificate or his legal
representative to give bond, with sufficient surety, to the Corporation and each
Transfer Agent,- if any, and to indemnify it and each Transfer Agent against any
and all loss or claims which may arise by reason of the issue of a new
certificate in the place of the one so lost, stolen or destroyed.
ARTICLE V
CORPORATE SEAL
The Board of Directors may provide for a suitable corporate seal, in such
form and bearing such inscriptions as it may determine.
ARTICLE VI
FISCAL YEAR
The fiscal year of the Corporation shall begin on the first day of March
and shall end on the last day of February in each year.
<PAGE>
ARTICLE VII
INDEMNIFICATION
The Corporation shall indemnify present and former directors, officers,
employees and agents of the Corporation (each, a "Covered Person") against
judgments, fines, settlements and expenses to the fullest extent authorized, and
in the manner permitted, by applicable federal and state law.
The Corporation shall advance the expenses of Covered Persons who are
parties to any Proceeding to the fullest extent authorized, and in the manner
permitted, by applicable federal and state law. For purposes of this paragraph,
"Proceeding" means any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative, or investigative.
Pursuant and subject to the provisions of this Article, the Corporation
shall indemnify each Covered Person against, or advance the expenses of any
Covered Person for, the amount of any deductible provided in any liability
insurance policy maintained by the Corporation.
ARTICLE VIII
CUSTODIAN
Section 1. The Corporation shall have as custodian or custodians one or
more trust companies or banks of good standing, each having a capital, surplus
and undivided profits aggregating not less than fifty million dollars ($50, 000,
<PAGE>
000) , and, to the extent required by the Investment Company Act of 1940, the
funds and securities held by the Corporation shall be kept in the custody of one
or more such custodians, provided such custodian or custodians can be found
ready and willing to act, and further provided that the Corporation may use as
subcustodians, for the purpose of holding any foreign securities and related
funds of the Corporation such foreign banks as the Board of Directors may
approve and as shall be permitted by law.
Section 2. The Corporation shall upon the resignation or inability to serve
of its custodian or upon change of the custodian:
(i) in case of such resignation or inability to serve, use its
best efforts to obtain a successor custodian;
(ii) require that the cash and securities owned by the
Corporation by delivered directly to the successor custodian; and
(iii) in the event that no successor custodian can be found,
submit to the stockholders before permitting delivery of the cash and
securities owned by the Corporation otherwise than to a successor
custodian, the question whether or not this Corporation shall be
liquidated or shall function without a custodian.
<PAGE>
ARTICLE IX
AMENDMENT OF BY-LAWS
The By-Laws of the Corporation may be altered, amended, added to or
repealed by the stockholders or by majority vote of the entire Board of
Directors; but any such alteration, amendment, addition or repeal of the By-Laws
by action of the Board of Directors may be altered or repealed by stockholders.
<PAGE>
EXHIBIT (d)(3)
AMENDMENT TO SUBADVISORY AGREEMENT
PRUDENTIAL GOVERNMENT INCOME FUND, INC.
AMENDMENT made as of this 18 th day of November, 1999, between Prudential
Investments Fund Management LLC ("PIFM"), and The Prudential Investment
Corporation ("PIC").
WHEREAS, PIFM, either itself or as successor to Prudential Investments Fund
Management, Inc., and PIC have entered into a Subadvisory Agreement (the
"Agreement") dated July 1st , 1988, with respect to the management of Prudential
Government Income Fund, Inc. (the "Fund"); and
WHEREAS, the Agreement provides that PIC shall provide investment advisory
services to the Fund, subject to oversight by PIFM; and
WHEREAS, PIFM and PIC desire to amend the Agreement with respect to the
compensation to be paid by PIFM to PIC for services provided by PIC pursuant to
the Agreement.
NOW, THEREFORE, for and in consideration of the continuation of the
Agreement for its current term, and other good and valuable consideration, PIFM
and PIC hereby amend the Agreement to provide for the compensation to be paid by
PIFM to PIC as described on the attached schedule, effective as of January 1,
2000, for the same term, including renewals, as the Agreement and upon the same
terms and conditions as described in the Agreement.
IN WITNESS WHEREOF, PIMS and PIC have signed this Amendment as of the day
and year first above written.
PRUDENTIAL INVESTMENTS THE PRUDENTIAL INVESTMENT
FUND MANAGEMENT LLC CORPORATION
By: /s/ Robert F. Gunia By: /s/ John R. Strangfeld, Jr.
------------------------- ----------------------------
Name: Robert F. Gunia Name: John R. Strangfeld, Jr.
Title: Executive Vice President Title: Chairman of the Board,
and Chief Administrative President, Chief Executive
Officer Officer and Director
<PAGE>
<TABLE>
<CAPTION>
Fund Name Contractual Compensation
Domestic Equity Mgmt Fee to PGAM
<S> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------------
EQUITY FUNDS
- --------------------------------------------------------------------------------------------------------------------------------
Prudential 20/20 Focus Fund* 0.75% 0.375%
- --------------------------------------------------------------------------------------------------------------------------------
Prudential Balanced Fund 0.65% 0.325%
- --------------------------------------------------------------------------------------------------------------------------------
Prudential Developing Markets Fund -Developing Markets Equity Fund 1.25% 0.625%
- --------------------------------------------------------------------------------------------------------------------------------
Prudential Developing Markets Fund -Latin America Equity Fund 1.25% 0.625%
- --------------------------------------------------------------------------------------------------------------------------------
Prudential Diversified Conservative Growth Fund* 0.75% 0.375%
- --------------------------------------------------------------------------------------------------------------------------------
Prudential Diversified Moderate Growth Fund* 0.75% 0.375%
- --------------------------------------------------------------------------------------------------------------------------------
Prudential Diversified High Growth Fund* 0.75% 0.375%
- --------------------------------------------------------------------------------------------------------------------------------
Prudential Distressed Securities Fund, Inc. 0.75% 0.375%
- --------------------------------------------------------------------------------------------------------------------------------
Prudential Emerging Growth Fund, Inc. 0.60% 0.300%
- --------------------------------------------------------------------------------------------------------------------------------
Prudential Equity Fund, Inc. .50% to $500 mil 0.250%
- --------------------------------------------------------------------------------------------------------------------------------
.475% next $500 mil 0.226%
- --------------------------------------------------------------------------------------------------------------------------------
.45% over 1 bil 0.203%
- --------------------------------------------------------------------------------------------------------------------------------
Prudential Equity Income Fund .60% to $500 mil 0.300%
- --------------------------------------------------------------------------------------------------------------------------------
.50% next $500 mil 0.238%
- --------------------------------------------------------------------------------------------------------------------------------
.475% next $500 mil 0.214%
- --------------------------------------------------------------------------------------------------------------------------------
.45% over 1.5 bil 0.191%
- --------------------------------------------------------------------------------------------------------------------------------
Prudential Bond Market Index Fund 0.25% 0.125%
- --------------------------------------------------------------------------------------------------------------------------------
Prudential Europe Index Fund 0.40% 0.200%
- --------------------------------------------------------------------------------------------------------------------------------
Prudential Pacific Index Fund 0.40% 0.200%
- --------------------------------------------------------------------------------------------------------------------------------
Prudential Small Cap Index Fund 0.30% 0.195%
- --------------------------------------------------------------------------------------------------------------------------------
Prudential Stock Index Fund 0.30% 0.150%
- --------------------------------------------------------------------------------------------------------------------------------
Prudential Active Balanced Fund 0.65% 0.325%
- --------------------------------------------------------------------------------------------------------------------------------
Prudential Mid-Cap Value Fund 0.70% 0.350%
- --------------------------------------------------------------------------------------------------------------------------------
Prudential Natural Resources Fund 0.75% 0.375%
- --------------------------------------------------------------------------------------------------------------------------------
Prudential Real Estate Securities Fund 0.75% .45% to $250 mil
- --------------------------------------------------------------------------------------------------------------------------------
.40% next $250 mil
- --------------------------------------------------------------------------------------------------------------------------------
.35% next $250 mil
- --------------------------------------------------------------------------------------------------------------------------------
.30% over $750 mil
- --------------------------------------------------------------------------------------------------------------------------------
Prudential Financial Services Fund 0.75% 0.375%
- --------------------------------------------------------------------------------------------------------------------------------
Prudential Health Sciences Fund* 0.75% 0.375%
- --------------------------------------------------------------------------------------------------------------------------------
Prudential Technology Fund 0.75% 0.375%
- --------------------------------------------------------------------------------------------------------------------------------
Prudential Utility Fund .60% to $250 mil 0.300%
- --------------------------------------------------------------------------------------------------------------------------------
.50% next $500 mil 0.238%
- --------------------------------------------------------------------------------------------------------------------------------
.45% next $750 mil 0.203%
- --------------------------------------------------------------------------------------------------------------------------------
.40% next $500 mil 0.170%
- --------------------------------------------------------------------------------------------------------------------------------
.35% next $2 bil 0.140%
- --------------------------------------------------------------------------------------------------------------------------------
.325% next $2 bil 0.122%
- --------------------------------------------------------------------------------------------------------------------------------
.30% over $6 bil 0.105%
- --------------------------------------------------------------------------------------------------------------------------------
Prudential Small-Cap Quantum Fund, Inc. 0.60% 0.390%
- --------------------------------------------------------------------------------------------------------------------------------
Prudential Small Company Value Fund, Inc. 0.70% 0.455%
- --------------------------------------------------------------------------------------------------------------------------------
Prudential Tax-Managed Equity Fund 0.65% 0.325%
- --------------------------------------------------------------------------------------------------------------------------------
Prudential World Fund, Inc., Global Series 0.75% 0.375%
- --------------------------------------------------------------------------------------------------------------------------------
Prudential Europe Growth Fund 0.75% 0.375%
- --------------------------------------------------------------------------------------------------------------------------------
Prudential Global Genesis Fund 1.00% 0.500%
- --------------------------------------------------------------------------------------------------------------------------------
Prudential Pacific Growth Fund 0.75% 0.375%
- --------------------------------------------------------------------------------------------------------------------------------
TAXABLE FIXED INCOME FUNDS
- --------------------------------------------------------------------------------------------------------------------------------
Prudential Diversified Bond Fund, Inc. 0.50% 0.250%
- --------------------------------------------------------------------------------------------------------------------------------
Prudential Global Limited Maturity Fund, Inc. 0.55% 0.275%
- --------------------------------------------------------------------------------------------------------------------------------
<PAGE>
<CAPTION>
Fund Name Contractual Compensation
Mgmt Fee to PGAM
<S> <C> <C>
Prudential Government Income Fund, Inc. .50% to $3 bil 0.250%
- --------------------------------------------------------------------------------------------------------------------------------
.35% over $3 bil 0.166%
- --------------------------------------------------------------------------------------------------------------------------------
Prudential Government Securities Trust Short Intermediate Term Series 0.40% 0.200%
- --------------------------------------------------------------------------------------------------------------------------------
The High Yield Income Fund, Inc. 0.70% 0.350%
- --------------------------------------------------------------------------------------------------------------------------------
Prudential High Yield Fund, Inc. .50% to $250 mil 0.250%
- --------------------------------------------------------------------------------------------------------------------------------
.475% next $500 mil 0.226%
- --------------------------------------------------------------------------------------------------------------------------------
.45% next $750 mil 0.203%
- --------------------------------------------------------------------------------------------------------------------------------
.425% next $500 mil 0.181%
- --------------------------------------------------------------------------------------------------------------------------------
.40% next $500 mil 0.160%
- --------------------------------------------------------------------------------------------------------------------------------
.375% next $500 mil 0.141%
- --------------------------------------------------------------------------------------------------------------------------------
.35% over $3 bil 0.123%
- --------------------------------------------------------------------------------------------------------------------------------
Prudential High Yield Total Return Fund, Inc. 0.65% 0.325%
- --------------------------------------------------------------------------------------------------------------------------------
Prudential Intermediate Global Income Fund, Inc. 0.75% 0.375%
- --------------------------------------------------------------------------------------------------------------------------------
Prudential International Bond Fund, Inc, .75% to 1 bil 0.375%
- --------------------------------------------------------------------------------------------------------------------------------
.70% over 1 bil 0.333%
- --------------------------------------------------------------------------------------------------------------------------------
Prudential Structured Maturity Fund, Inc. 0.40% 0.200%
- --------------------------------------------------------------------------------------------------------------------------------
Prudential Global Total Return Fund, Inc. .75% to $500 mil 0.375%
- --------------------------------------------------------------------------------------------------------------------------------
.70% next $500 mil 0.333%
- --------------------------------------------------------------------------------------------------------------------------------
.65% over $1 bil 0.293%
- --------------------------------------------------------------------------------------------------------------------------------
TAX-EXEMPT FIXED INCOME FUNDS
- --------------------------------------------------------------------------------------------------------------------------------
Prudential California Municipal Fund - California Series 0.50% 0.250%
- --------------------------------------------------------------------------------------------------------------------------------
Prudential California Municipal Fund - California Income 0.50% 0.250%
- --------------------------------------------------------------------------------------------------------------------------------
Prudential National Municipals Fund, Inc. .50% to $250 mil 0.250%
- --------------------------------------------------------------------------------------------------------------------------------
.475% next $250 mil 0.226%
- --------------------------------------------------------------------------------------------------------------------------------
.45% next $500 mil 0.203%
- --------------------------------------------------------------------------------------------------------------------------------
.425% next $250 mil 0.181%
- --------------------------------------------------------------------------------------------------------------------------------
.40% next $250 mil 0.160%
- --------------------------------------------------------------------------------------------------------------------------------
.375% over $1.5 bil 0.141%
- --------------------------------------------------------------------------------------------------------------------------------
Prudential Municipal Bond Fund - High Income Series .50% to 1 bil 0.250%
- --------------------------------------------------------------------------------------------------------------------------------
.45% over 1 bil 0.214%
- --------------------------------------------------------------------------------------------------------------------------------
Prudential Municipal Bond Fund - Insured Series .50% to 1 bil 0.250%
- --------------------------------------------------------------------------------------------------------------------------------
.45% over 1 bil 0.214%
- --------------------------------------------------------------------------------------------------------------------------------
Prudential Municipal Series Fund - Florida Series 0.50% 0.250%
- --------------------------------------------------------------------------------------------------------------------------------
Prudential Municipal Series Fund - Massachusetts Series 0.50% 0.250%
- --------------------------------------------------------------------------------------------------------------------------------
Prudential Municipal Series Fund - New Jersey Series 0.50% 0.250%
- --------------------------------------------------------------------------------------------------------------------------------
Prudential Municipal Series Fund - New York Series 0.50% 0.250%
- --------------------------------------------------------------------------------------------------------------------------------
Prudential Municipal Series Fund - North Carolina Series 0.50% 0.250%
- --------------------------------------------------------------------------------------------------------------------------------
Prudential Municipal Series Fund - Ohio Series 0.50% 0.250%
- --------------------------------------------------------------------------------------------------------------------------------
Prudential Municipal Series Fund - Pennsylvania Series 0.50% 0.250%
- --------------------------------------------------------------------------------------------------------------------------------
MONEY MARKET FUNDS
- --------------------------------------------------------------------------------------------------------------------------------
Command Money Fund .50% to $500 mil 0.250%
- --------------------------------------------------------------------------------------------------------------------------------
.425% next $500 mil 0.191%
- --------------------------------------------------------------------------------------------------------------------------------
.375% next $500 mil 0.150%
- --------------------------------------------------------------------------------------------------------------------------------
.35% over $1.5 bil 0.123%
- --------------------------------------------------------------------------------------------------------------------------------
Command Government Money Market Fund .40% to $1 bil 0.200%
- --------------------------------------------------------------------------------------------------------------------------------
.375% over $1 bil 0.169%
- --------------------------------------------------------------------------------------------------------------------------------
Command Tax-Free Fund .50% to $500 mil 0.250%
- --------------------------------------------------------------------------------------------------------------------------------
.425% next $500 mil 0.191%
- --------------------------------------------------------------------------------------------------------------------------------
.375% over $1bil 0.150%
- --------------------------------------------------------------------------------------------------------------------------------
<PAGE>
<CAPTION>
Fund Name Contractual Compensation
Mgmt Fee to PGAM
<S> <C> <C>
Prudential Government Securities Trust - Money Market Series .40% to $1 bil 0.200%
- --------------------------------------------------------------------------------------------------------------------------------
.375% next $500 mil 0.169%
- --------------------------------------------------------------------------------------------------------------------------------
.35% over $1.5 bil 0.140%
- --------------------------------------------------------------------------------------------------------------------------------
Prudential Government Securities Trust - U.S. Treasury Money Market Series 0.40% 0.200%
- --------------------------------------------------------------------------------------------------------------------------------
Prudential Institutional Liquidity Portfolio, Inc. 0.20% 0.100%
- --------------------------------------------------------------------------------------------------------------------------------
Prudential Tax-Free Money Market Fund, Inc. .50% to $750 mil 0.250%
- --------------------------------------------------------------------------------------------------------------------------------
.425% next $750 mil 0.191%
- --------------------------------------------------------------------------------------------------------------------------------
.375% over $1.5 bil 0.150%
- --------------------------------------------------------------------------------------------------------------------------------
Prudential California Municipal Fund - California Money Market Series 0.50% 0.250%
- --------------------------------------------------------------------------------------------------------------------------------
Prudential MoneyMart Assets, Inc. Fund .50% to $50 mil 0.250%
- --------------------------------------------------------------------------------------------------------------------------------
.30% over $50 mil 0.135%
- --------------------------------------------------------------------------------------------------------------------------------
Prudential Municipal Series Fund - Connecticut Money Market Series 0.50% 0.250%
- --------------------------------------------------------------------------------------------------------------------------------
Prudential Municipal Series Fund - Massachusetts Money Market Series 0.50% 0.250%
- --------------------------------------------------------------------------------------------------------------------------------
Prudential Municipal Series Fund - New Jersey Money Market Series 0.50% 0.250%
- --------------------------------------------------------------------------------------------------------------------------------
Prudential Municipal Series Fund - New York Money Market Series 0.50% 0.250%
- --------------------------------------------------------------------------------------------------------------------------------
Prudential Special Money Fund - Money Market Series 0.50% 0.250%
- --------------------------------------------------------------------------------------------------------------------------------
Cash Accummulated Trust Fund: Liquid Assets 0.07% 0.035%
- --------------------------------------------------------------------------------------------------------------------------------
Cash Accummulated Trust Fund: National Money Market .39% to $1 bil 0.195%
- --------------------------------------------------------------------------------------------------------------------------------
.375% next $500 mil 0.169%
- --------------------------------------------------------------------------------------------------------------------------------
.35% next $500 mil 0.140%
- --------------------------------------------------------------------------------------------------------------------------------
.325% over $2 bil 0.114%
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Compensation to PGAM based on Prudential advised assets only.
<PAGE>
EXHIBIT (g)(5)
AMENDMENT TO CUSTODIAN CONTRACT/AGREEMENT
This Amendment to the respective Custodian Contract/Agreement is made as of
February 22, 1999 by and between each of the funds listed on Schedule D
(including any series thereof, each, a "Fund") and State Street Bank and Trust
Company (the "Custodian"). Capitalized terms used in this Amendment without
definition shall have the respective meanings given to such terms in the
Custodian Contract/Agreement referred to below.
WHEREAS, each Fund and the Custodian have entered into a Custodian
Contract/Agreement dated as of the dates set forth on Schedule D (each contract,
as amended, a "Contract"); and
WHEREAS, each Fund and the Custodian desire to amend certain provisions of
the Contract to reflect revisions to Rule 17f-5 ("Rule 17f-5") promulgated under
the Investment Company Act of 1940, as amended (the "1940 Act"); and
WHEREAS, each Fund and the Custodian desire to amend and restate certain
other provisions of the Contract relating to the custody of assets of each of
the Funds held outside of the United States.
NOW THEREFORE, in consideration of the foregoing and the mutual covenants
and agreements hereinafter contained, the parties hereby agree to amend the
Contract, to add the following new provisions which supersede the provisions in
the existing contracts relating to the custody of assets of the Funds outside
the United States.
3. THE CUSTODIAN AS FOREIGN CUSTODY MANAGER.
3.1. DEFINITIONS.
Capitalized terms in this Article 3 shall have the following meanings:
"Country Risk" means all factors reasonably related to the systemic risk of
holding Foreign Assets in a particular country including, but not limited to,
such country's political environment; economic and financial infrastructure;
systemic custody and securities settlement practices; and laws and regulations
applicable to the safekeeping and recovery of Foreign Assets held in custody in
that country.
"Eligible Foreign Custodian" has the meaning set forth in section (a)(1) of Rule
17f-5, including a majority-owned or indirect subsidiary of a U.S. Bank (as
defined in Rule 17f-5), a bank holding company meeting the requirements of an
Eligible Foreign Custodian (as set forth in Rule 17f-5 or by other appropriate
action of the U.S. Securities and Exchange Commission (the "SEC")), or a foreign
branch of a Bank (as defined in Section 2(a)(5) of the 1940 Act) meeting the
requirements of a custodian under Section 17(f) of the 1940 Act, except that the
term does not include Mandatory Securities Depositories.
1
<PAGE>
"Foreign Assets" means any of the Funds' investments (including foreign
currencies) for which the primary market is outside the United States and such
cash and cash equivalents as are reasonably necessary to effect the Funds'
transactions in such investments.
"Foreign Custody Manager" has the meaning set forth in section (a)(2) of Rule
17f-5.
"Mandatory Securities Depository" means a foreign securities depository or
clearing agency that, either as a legal or practical matter, must be used if the
Fund determines to place Foreign Assets in a country outside the United States
(i) because required by law or regulation; (ii) because securities cannot be
withdrawn from such foreign securities depository or clearing agency; or (iii)
because maintaining or effecting trades in securities outside the foreign
securities depository or clearing agency is not consistent with systemic
custodial or market practices.
3.2. DELEGATION TO THE CUSTODIAN AS FOREIGN CUSTODY MANAGER.
Each Fund, by resolution adopted by its Board of Trustees/Directors (the
"Board"), hereby delegates to the Custodian subject to Section (b) of Rule
17f-5, the responsibilities set forth in this Article 3 with respect to Foreign
Assets of the Fund held outside the United States, and the Custodian hereby
accepts such delegation, as Foreign Custody Manager with respect to the Funds.
3.3. COUNTRIES COVERED.
The Foreign Custody Manager shall be responsible for performing the delegated
responsibilities defined below only with respect to the countries and custody
arrangements for each such country listed on Schedule A to this Contract, which
list of countries may be amended from time to time by the Fund with the
agreement of the Foreign Custody Manager. The Foreign Custody Manager shall list
on Schedule A the Eligible Foreign Custodians selected by the Foreign Custody
Manager to maintain the assets of the Funds which list of Eligible Foreign
Custodians may be amended from time to time in the sole discretion of the
Foreign Custody Manager. Mandatory Securities Depositories are listed on
Schedule B to this Contract, which Schedule B may be amended from time to time
by the Foreign Custody Manager upon reasonable notice to the Fund. The Foreign
Custody Manager will provide amended versions of Schedules A and B in accordance
with Section 3.7 of this Article 3.
Upon the receipt by the Foreign Custody Manager of Proper Instructions to open
an account or to place or maintain Foreign Assets in a country listed on
Schedule A, and the fulfillment by a Fund of the applicable account opening
requirements for such country, the Foreign Custody Manager shall be deemed to
have been delegated by that Fund's Board responsibility as Foreign Custody
Manager with respect to that country and to have accepted such delegation.
Execution of this Amendment by the Fund shall be deemed to be a Proper
Instruction to open an account, or to place or maintain Foreign Assets, in each
country listed on Schedule A in which the Custodian has previously placed or
currently maintains Foreign Assets pursuant to the terms of the
2
<PAGE>
Contract. Following the receipt of Proper Instructions directing the Foreign
Custody Manager to close the account of a Fund with the Eligible Foreign
Custodian selected by the Foreign Custody Manager in a designated country, the
delegation by that Fund's Board to the Custodian as Foreign Custody Manager for
that country shall be deemed to have been withdrawn and the Custodian shall
immediately cease to be the Foreign Custody Manager of the Fund with respect to
that country.
The Foreign Custody Manager may withdraw its acceptance of delegated
responsibilities with respect to a designated country upon written notice to the
Fund. Thirty days (or such longer period as to which the parties agree in
writing) after receipt of any such notice by the Fund, the Custodian shall have
no further responsibility as Foreign Custody Manager to the Fund with respect to
the country as to which the Custodian's acceptance of delegation is withdrawn.
3.4. SCOPE OF DELEGATED RESPONSIBILITIES.
3.4.1. SELECTION OF ELIGIBLE FOREIGN CUSTODIANS.
Subject to the provisions of this Article 3, the Fund's Foreign Custody Manager
may place and maintain the Foreign Assets in the care of the Eligible Foreign
Custodian selected by the Foreign Custody Manager in each country listed on
Schedule A, as amended from time to time.
In performing its delegated responsibilities as Foreign Custody Manager to place
or maintain Foreign Assets with an Eligible Foreign Custodian, the Foreign
Custody Manager shall determine that the Foreign Assets will be subject to
reasonable care, based on the standards applicable to custodians in the country
in which the Foreign Assets will be held by that Eligible Foreign Custodian,
after considering all factors relevant to the safekeeping of such assets,
including, without limitation the factors specified in Rule 17f-5(c)(1).
3.4.2. CONTRACTS WITH ELIGIBLE FOREIGN CUSTODIANS.
The Foreign Custody Manager shall determine that the contract (or the rules or
established practices or procedures in the case of an Eligible Foreign Custodian
that is a foreign securities depository or clearing agency) governing the
foreign custody arrangements with each Eligible Foreign Custodian selected by
the Foreign Custody Manager will satisfy the requirements of Rule 17f-5(c)(2).
3.4.3. MONITORING.
In each case in which the Foreign Custody Manager maintains Foreign Assets with
an Eligible Foreign Custodian selected by the Foreign Custody Manager, the
Foreign Custody Manager shall establish a system to monitor (i) the
appropriateness of maintaining the Foreign Assets with such Eligible Foreign
Custodian and (ii) the contract governing the custody arrangements established
by the Foreign Custody Manager with the Eligible Foreign Custodian (or the rules
or established practices and procedures in the case of an Eligible Foreign
Custodian selected by the Foreign
3
<PAGE>
Custody Manager which is a foreign securities depository or clearing agency that
is not a Mandatory Securities Depository). The Foreign Custody Manager shall
provide the Board at least annually with information as to the factors used in
such monitoring system. If the Foreign Custody Manager determines that the
custody arrangements with an Eligible Foreign Custodian it has selected are no
longer appropriate, the Foreign Custody Manager shall notify the Board in
accordance with Section 3.7 hereunder and withdraw the Foreign Assets from such
Eligible Foreign Custodian as soon as reasonably practicable.
3.5. GUIDELINES FOR THE EXERCISE OF DELEGATED AUTHORITY.
For purposes of this Article 3, the Foreign Custody Manager shall have no
responsibility for Country Risk as is incurred by placing and maintaining the
Foreign Assets in each country for which the Custodian is serving as Foreign
Custody Manager of the Portfolios. The Fund and the Custodian each expressly
acknowledge that the Foreign Custody Manager shall not be delegated any
responsibilities under this Article 3 with respect to Mandatory Securities
Depositories.
3.6. STANDARD OF CARE AS FOREIGN CUSTODY MANAGER OF A PORTFOLIO.
In performing the responsibilities delegated to it, the Foreign Custody Manager
agrees to exercise reasonable care, prudence and diligence such as a person
having responsibility for the safekeeping of assets of management investment
companies registered under the 1940 Act would exercise.
3.7. REPORTING REQUIREMENTS.
The Foreign Custody Manager shall report the placement of Foreign Assets with an
Eligible Foreign Custodian, the withdrawal of the Foreign Assets from an
Eligible Foreign Custodian and the placement of such Foreign Assets with another
Eligible Foreign Custodian by providing to the Board amended Schedules A or B at
the end of the calendar quarter in which an amendment to either Schedule has
occurred. The Foreign Custody Manager shall make written reports notifying the
Board of any other material change in the foreign custody arrangements of the
Funds described in this Article 3 promptly after the occurrence of the material
change.
3.8. REPRESENTATIONS WITH RESPECT TO RULE 17f-5.
The Foreign Custody Manager represents to the Fund that it is a U.S. Bank as
defined in section (a)(7) of Rule 17f-5.
3.9. EFFECTIVE DATE AND TERMINATION OF THE CUSTODIAN AS FOREIGN CUSTODY
MANAGER.
The Board's delegation to the Custodian as Foreign Custody Manager of the Funds
shall be effective as of the date hereof and shall remain in effect until
terminated at any time, without penalty, by written notice from the terminating
party to the non-terminating party. Termination will become effective sixty (60)
days after receipt by the non-terminating party of such notice.
4
<PAGE>
The provisions of Section 3.3 hereof shall govern the delegation to and
termination of the Custodian as Foreign Custody Manager of the Funds with
respect to designated countries.
3.10. MOST FAVORED CLIENT.
If at any time prior to termination of this Amendment, the Custodian, as a
matter of standard business practice, accepts delegation as Foreign Custody
Manager for its U.S. mutual fund clients on terms of materially greater benefit
to the Funds than set forth in this Amendment, the Custodian hereby agrees to
negotiate with the Funds in good faith with respect thereto.
4. DUTIES OF THE CUSTODIAN WITH RESPECT TO PROPERTY OF THE FUNDS HELD
OUTSIDE THE UNITED STATES.
4.1 DEFINITIONS.
Capitalized terms in this Article 4 shall have the following meanings:
"Foreign Securities System" means either a clearing agency or a securities
depository listed on Schedule A hereto or a Mandatory Securities Depository
listed on Schedule B hereto.
"Foreign Sub-Custodian" means a foreign banking institution (including a foreign
branch of the Custodian or another Bank (as defined in Section 2(a)(5) of the
1940 Act)) serving as an Eligible Foreign Custodian.
4.2. HOLDING SECURITIES.
The Custodian shall identify on its books as belonging to the Funds the foreign
securities held by each Foreign Sub-Custodian or Foreign Securities System. The
Custodian may hold foreign securities for all of its customers, including the
Funds, with any Foreign Sub-Custodian in an 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 foreign securities of the
Funds which are maintained in such account shall identify those securities as
belonging to the Funds and (ii), to the extent permitted and customary in the
market in which the account is maintained, the Custodian shall require that
securities so held by the Foreign Sub-Custodian be held separately from any
assets of such Foreign Sub-Custodian or of other customers of such Foreign
Sub-Custodian.
4.3. FOREIGN SECURITIES SYSTEMS.
Foreign securities shall be maintained in a Foreign Securities System in a
designated country only through arrangements implemented by the Foreign
Sub-Custodian in such country pursuant to the terms of this Contract.
4.4. TRANSACTIONS IN FOREIGN CUSTODY ACCOUNT.
5
<PAGE>
4.4.1. DELIVERY OF FOREIGN ASSETS.
The Custodian or a Foreign Sub-Custodian shall release and deliver foreign
securities of the Funds held by such Foreign Sub-Custodian, or in a Foreign
Securities System account, only upon receipt of Proper Instructions, which may
be continuing instructions when deemed appropriate by the parties, and only in
the following cases:
(i) upon the sale of such foreign securities for the Fund in accordance
with customary market practice in the country where such foreign
securities are held or traded, including, without limitation: (A)
delivery against expectation of receiving later payment; or (B) in
the case of a sale effected through a Foreign Securities System, in
accordance with the rules governing the operation of the Foreign
Securities System;
(ii) in connection with any repurchase agreement related to foreign
securities;
(iii) to the depository agent in connection with tender or other similar
offers for foreign securities of the Portfolios;
(iv) to the issuer thereof or its agent when such foreign securities are
called, redeemed, retired or otherwise become payable;
(v) to the issuer thereof, or its agent, for transfer into the name of
the Custodian (or the name of the respective Foreign Sub-Custodian
or of any nominee of the Custodian or such Foreign Sub-Custodian)
or for exchange for a different number of bonds, certificates or
other evidence representing the same aggregate face amount or
number of units;
(vi) to brokers, clearing banks or other clearing agents for examination
or trade execution in accordance with reasonable market custom;
PROVIDED that in any such case the Foreign Sub-Custodian shall have
no responsibility or liability for any loss arising from the
delivery of such securities prior to receiving payment for such
securities except as may arise from the Foreign Sub-Custodian's own
negligence or willful misconduct;
(vii) for exchange or conversion pursuant to any plan of merger,
consolidation, recapitalization, reorganization or readjustment of
the securities of the issuer of such securities, or pursuant to
provisions for conversion contained in such securities, or pursuant
to any deposit agreement;
(viii) in the case of warrants, rights or similar foreign securities, the
surrender thereof in the exercise of such warrants, rights or
similar securities or the surrender of interim receipts or temporary
securities for definitive securities;
6
<PAGE>
(ix) for delivery as security in connection with any borrowing by the
Funds requiring a pledge of assets by the Funds;
(x) in connection with trading in options and futures contracts,
including delivery as original margin and variation margin;
(xi) in connection with the lending of foreign securities; and
(xii) for any other proper purpose, BUT ONLY upon receipt of Proper
Instructions specifying the foreign securities to be delivered,
setting forth the purpose for which such delivery is to be made,
declaring such purpose to be a proper trust\corporate purpose, and
naming the person or persons to whom delivery of such securities
shall be made.
4.4.2. PAYMENT OF FUND MONIES.
Upon receipt of Proper Instructions, which may be continuing instructions when
deemed appropriate by the parties, the Custodian shall pay out, or direct the
respective Foreign Sub-Custodian or the respective Foreign Securities System to
pay out, monies of a Fund in the following cases only:
(i) upon the purchase of foreign securities for the Fund, unless
otherwise directed by Proper Instructions, in accordance with
reasonable market settlement practice in the country where such
foreign securities are held or traded, including, without
limitation, (A) delivering money to the seller thereof or to a
dealer therefor (or an agent for such seller or dealer) against
expectation of receiving later delivery of such foreign securities;
or (B) in the case of a purchase effected through a Foreign
Securities System, in accordance with the rules governing the
operation of such Foreign Securities System;
(ii) in connection with the conversion, exchange or surrender of foreign
securities of the Fund;
(iii) for the payment of any expense or liability of the Fund, including
but not limited to the following payments: interest, taxes,
investment advisory fees, transfer agency fees, fees under this
Contract, legal fees, accounting fees, and other operating
expenses;
(iv) for the purchase or sale of foreign exchange or foreign exchange
contracts for the Fund, including transactions executed with or
through the Custodian or its Foreign Sub-Custodians;
(v) in connection with trading in options and futures contracts,
including delivery as
7
<PAGE>
original margin and variation margin;
(vi) for payment of part or all of the dividends received in respect of
securities sold short;
(vii) in connection with the borrowing or lending of foreign securities;
and
(viii) for any other proper purpose, BUT ONLY upon receipt of Proper
Instructions specifying the amount of such payment, setting forth
the purpose for which such payment is to be made, declaring such
purpose to be a proper trust\corporate purpose, and naming the
person or persons to whom such payment is to be made.
4.4.3. MARKET CONDITIONS; MARKET INFORMATION.
Notwithstanding any provision of this Contract to the contrary, settlement and
payment for Foreign Assets received for the account of the Funds and delivery of
Foreign Assets maintained for the account of the Funds may be effected in
accordance with the customary established securities trading or processing
practices and procedures in the country or market in which the transaction
occurs generally accepted by Institutional Clients, including, without
limitation, delivering Foreign Assets to the purchaser thereof or to a dealer
therefor (or an agent for such purchaser or dealer) with the expectation of
receiving later payment for such Foreign Assets from such purchaser or dealer.
For purposes of this Agreement, the term "Institutional Clients" means U.S.
registered investment companies or major U.S. commercial banks, insurance
companies, pension funds or substantially similar institutions which, as a part
of their ordinary business operations, purchase or sell securities and make use
of global custody services.
The Custodian shall provide to the Board information with respect to material
changes in the custody and settlement practices in countries in which the
Custodian employs a Foreign Sub-Custodian. The Custodian shall provide, without
limitation, information relating to Foreign Securities Systems and other
information described in Schedule C. The Custodian may revise Schedule C from
time to time, provided that no such revision shall result in the Board being
provided with substantively less information than had previously been provided
hereunder and provided further that the Custodian shall in any event provide to
the Board at least annually the following information and opinions with respect
to the Board approved countries listed on Schedule A:
(i) legal opinions relating to whether local law restricts with respect
to U.S. registered mutual funds (a) access of a fund's independent
public accountants to books and records of a Foreign Sub-Custodian
or Foreign Securities System, (b) a fund's ability to recover in the
event of bankruptcy or insolvency of a Foreign Sub-Custodian or
Foreign Securities System, (c) a fund's ability to recover in the
event of a loss by a Foreign Sub-Custodian or Foreign Securities
System, and (d)
8
<PAGE>
the ability of a foreign investor to convert cash and cash
equivalents to U.S. dollars;
(ii) summary of information regarding Foreign Securities Systems; and
(iii) country profile information containing market practice for (a)
delivery versus payment, (b) settlement method, (c) currency
restrictions, (d) buy-in practices, (e) foreign ownership limits,
and (f) unique market arrangements.
4.5. REGISTRATION OF FOREIGN SECURITIES.
The foreign securities maintained in the custody of a Foreign Sub-Custodian
(other than bearer securities) shall be registered in the name of the applicable
series or in the name of the Custodian or in the name of any Foreign
Sub-Custodian or in the name of any nominee of the foregoing, and the Fund
agrees to hold any such nominee harmless from any liability as a holder of
record of such foreign securities, except to the extent that the Fund incurs
loss or damage due to failure of such nominee to meet its standard of care set
forth in the Contract. The Custodian or a Foreign Sub-Custodian shall not be
obligated to accept securities on behalf of a Fund under the terms of this
Contract unless the form of such securities and the manner in which they are
delivered are in accordance with reasonable market practice.
4.6. BANK ACCOUNTS.
The Custodian shall identify on its books as belonging to the Fund cash
(including cash denominated in foreign currencies) deposited with the Custodian.
Where the Custodian is unable to maintain, or market practice does not
facilitate the maintenance of, cash on the books of the Custodian, a bank
account or bank accounts opened and maintained outside the United States on
behalf of a Fund with a Foreign Sub-Custodian shall be subject only to draft or
order by the Custodian or such Foreign Sub-Custodian, acting pursuant to the
terms of this Contract to hold cash received by or from or for the account of
the Portfolio.
4.7. COLLECTION OF INCOME.
The Custodian shall use reasonable commercial efforts to collect all income and
other payments with respect to the Foreign Assets held hereunder to which the
Funds shall be entitled and shall credit such income, as collected, to the
applicable Fund. In the event that extraordinary measures are required to
collect such income, the Fund and the Custodian shall consult as to such
measures and as to the compensation and expenses of the Custodian relating to
such measures.
4.8. SHAREHOLDER RIGHTS.
With respect to the foreign securities held pursuant to this Article 4, the
Custodian will use
9
<PAGE>
reasonable commercial efforts to facilitate the exercise of voting and other
shareholder rights, subject always to the laws, regulations and practical
constraints that may exist in the country where such securities are issued. The
Fund acknowledges that local conditions, including lack of regulation, onerous
procedural obligations, lack of notice and other factors may have the effect of
severely limiting the ability of the Fund to exercise shareholder rights.
4.9. COMMUNICATIONS RELATING TO FOREIGN SECURITIES.
The Custodian shall transmit promptly to the Fund written information
(including, without limitation, pendency of calls and maturities of foreign
securities and expirations of rights in connection therewith) received by the
Custodian via the Foreign Sub-Custodians from issuers of the foreign securities
being held for the account of the Funds. With respect to tender or exchange
offers, the Custodian shall transmit promptly to the Fund written information so
received by the Custodian from issuers of the foreign securities whose tender or
exchange is sought or from the party (or its agents) making the tender or
exchange offer. Subject to the standard of care to which the Custodian is held
under this Agreement, the Custodian shall not be liable for any untimely
exercise of any tender, exchange or other right or power in connection with
foreign securities or other property of the Funds at any time held by it unless
(i) the Custodian or the respective Foreign Sub-Custodian is in actual
possession of such foreign securities or property and (ii) the Custodian
receives Proper Instructions with regard to the exercise of any such right or
power, and both (i) and (ii) occur at least three business days prior to the
date on which the Custodian is to take action to exercise such right or power.
4.10. LIABILITY OF FOREIGN SUB-CUSTODIANS AND FOREIGN SECURITIES SYSTEMS.
Each agreement pursuant to which the Custodian employs a Foreign Sub-Custodian
shall, to the extent possible, require the Foreign Sub-Custodian to exercise
reasonable care in the performance of its duties and, to the extent possible, to
indemnify, and hold harmless, the Custodian from and against any loss, damage,
cost, expense, liability or claim arising out of or in connection with the
Foreign Sub-Custodian's performance of such obligations. At each Fund's
election, a Fund shall be entitled to be subrogated to the rights of the
Custodian with respect to any claims against a Foreign Sub-Custodian as a
consequence of any such loss, damage, cost, expense, liability or claim if and
to the extent that a Fund and any applicable series have not been made whole for
any such loss, damage, cost, expense, liability or claim.
4.11. TAX LAW.
Except to the extent that imposition of any tax liability arises from the
Custodian's failure to perform in accordance with the terms of this Section
4.11 or from the failure of any Foreign Sub-Custodian to perform in
accordance with the terms of the applicable subcustody agreement, the
Custodian shall have no responsibility or liability for any obligations now
or hereafter imposed on a Fund, a series thereof or the Custodian as
custodian of the Fund by the tax law of the United States or of any state or
political subdivision thereof. It shall be the responsibility of each Fund to
notify the Custodian of the obligations imposed on the Fund or the Custodian
as custodian of
10
<PAGE>
the Fund by the tax law of countries other than those mentioned in the above
sentence, including responsibility for withholding and other taxes, assessments
or other governmental charges, certifications and governmental reporting. The
sole responsibility of the Custodian with regard to such tax law shall be to use
reasonable efforts to assist the Fund with respect to any claim for exemption or
refund under the tax law of countries for which the Fund has provided such
information.
4.12. LIABILITY OF CUSTODIAN.
Except as may arise from the Custodian's own negligence or willful misconduct or
the negligence or willful misconduct of a Sub-Custodian, the Custodian shall be
without liability to a Fund for any loss, liability, claim or expense resulting
from or caused by anything which is (A) part of Country Risk or (B) part of the
"prevailing country risk" of the Fund, as such term is used in SEC Release Nos.
IC-22658; IS-1080 (May 12, 1997) or as such term or other similar terms are now
or in the future interpreted by the SEC or by the staff of the Division of
Investment Management of the SEC.
The Custodian shall be liable for the acts or omissions of a Foreign
Sub-Custodian to the same extent as set forth with respect to sub-custodians
generally in the Contract and, regardless of whether assets are maintained in
the custody of a Foreign Sub-Custodian or a Foreign Securities System, the
Custodian shall not be liable for any loss, damage, cost, expense, liability or
claim resulting from nationalization, expropriation, currency restrictions, or
acts of war or terrorism, or any other loss where the Sub-Custodian has
otherwise acted with reasonable care.
III. Except as specifically superseded or modified herein, the terms and
provisions of the Contract shall continue to apply with full force and
effect. In the event of any conflict between the terms of the Contract
prior to this Amendment and this Amendment, the terms of this Amendment
shall prevail. If the Custodian is delegated the responsibilities of
Foreign Custody Manager pursuant to the terms of Article 3 hereof, in
the event of any conflict between the provisions of Articles 3 and 4
hereof, the provisions of Article 3 shall prevail.
11
<PAGE>
IN WITNESS WHEREOF, each of the parties has caused this Amendment to be
executed in its name and behalf by its duly authorized representative as of the
date first above written.
WITNESSED BY: STATE STREET BANK AND TRUST
COMPANY
/s/Marc L. Parsons By: /s/Ronald E. Logue
- ------------------ ---------------------------
Marc L. Parsons Ronald E. Logue
Associate Counsel Executive Vice President
Cash Accumulation Trust
Command Government Fund
Command Money Fund
Command Tax-Free Fund
Global Utility Fund, Inc.
Nicholas-Applegate Fund, Inc.
Prudential 20/20 Focus Fund
Prudential Balanced Fund
Prudential California Municipal Fund
Prudential Developing Markets Fund
Prudential Distressed Securities Fund, Inc.
Prudential Diversified Bond Fund, Inc.
Prudential Diversified Funds
Prudential Index Series Fund
Prudential Emerging Growth Fund, Inc.
Prudential Equity Fund, Inc.
Prudential Equity Income Fund
Prudential Europe Growth Fund
Prudential Global Genesis Fund, Inc.
Prudential Global Limited Maturity Fund, Inc.
Prudential Government Income Fund, Inc.
Prudential Government Securities Trust
Prudential High Yield Fund, Inc.
Prudential High Yield Total Return Fund, Inc.
Prudential Institutional Liquidity Portfolio, Inc.
Prudential Intermediate Global Income Fund, Inc.
Prudential International Bond Fund, Inc.
The Prudential Investment Portfolios Fund, Inc.
Prudential Mid-Cap Value Fund
Prudential MoneyMart Assets, Inc.
<PAGE>
Prudential Mortgage Income Fund, Inc.
Prudential Multi-Sector Fund, Inc.
Prudential Municipal Bond Fund
Prudential Municipal Series Fund
Prudential National Municipals Fund, Inc.
Prudential Natural Resources Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Prudential Real Estate Securities Fund
Prudential Small Cap Quantum Fund, Inc.
Prudential Small Company Value Fund, Inc.
Prudential Special Money Market Fund, Inc.
Prudential Structured Maturity Fund, Inc.
Prudential Tax-Free Money Fund, Inc.
Prudential Tax-Managed Equity Fund
Prudential Utility Fund, Inc.
Prudential World Fund, Inc.
The Global Total Return Fund, Inc.
The Target Portfolio Trust
The Asia Pacific Fund, Inc.
The High Yield Income Fund, Inc.
WITNESSED BY:
By: /s/S. Jane Rose By: /s/Grace Torres
--------------- ---------------
Grace Torres
Treasurer
Prudential Government Income Fund, Inc.
Prudential High Yield Total Return Fund, Inc.
Prudential Municipal Bond Fund
Prudential California Municipal Fund
The High Yield Income Fund, Inc.
Prudential Municipal Series Fund
Prudential Government Securities Trust
Prudential Diversified Bond Fund, Inc.
Prudential High Yield Fund, Inc.
Prudential National Municipals Fund, Inc.
Prudential Structured Maturity Fund, Inc.
<PAGE>
WITNESSED BY:
By: /S/Robert Rosselot By: /S/Deborah A. Docs
------------------- ------------------
Deborah A. Docs
Secretary
<PAGE>
EXHIBIT (h)(2)
AMENDMENT TO TRANSFER AGENCY AND SERVICE AGREEMENT
THIS AMENDMENT to the Transfer Agency and Service Agreement by and between
Prudential Government Income Fund, Inc. (the "Fund") and Prudential Mutual Fund
Services LLC (successor to Prudential Mutual Fund Services, Inc.)("PMFS") is
entered into as of August 24, 1999.
WHEREAS, the Fund and PMFS have entered into a Transfer Agency and Service
Agreement (the "Agreement") pursuant to which PMFS serves as transfer agent,
dividend disbursing agent and shareholder servicing agent for the Fund; and
WHEREAS, the Fund and PMFS desire to amend the Agreement to confirm the
Fund's agreement to pay transfer agency account fees and expenses for beneficial
owners holding shares through omnibus accounts maintained by The Prudential
Insurance Company of America, its subsidiaries or affiliates.
NOW, THEREFORE, for and in consideration of the continuation of the
Agreement, and other good and valuable consideration, Article 8 of the Agreement
is amended by adding the following Section:
8.04 PMFS may enter into agreements with Prudential or any subsidiary
or affiliate of Prudential whereby PMFS will maintain an omnibus account
and the Fund will reimburse PMFS for amounts paid by PMFS to Prudential, or
such subsidiary or affiliate, in an amount not in excess of the annual
maintenance fee for each active beneficial shareholder account as if each
beneficial shareholder account were maintained by PMFS on the Fund's
records, subject to the fee schedule attached hereto as Schedule A.
Prudential, its subsidiary or affiliate, as the case may be, shall maintain
records relating to each beneficial shareholder account that underlies the
omnibus account maintained by PMFS.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed in their names and on their behalf by and through their duly authorized
officers, as of the day and year first above written.
PRUDENTIAL GOVERNMENT INCOME ATTEST:
FUND, INC.
By: /s/ Robert F. Gunia By: /s/ Deborah A. Docs
------------------------- ----------------------
Robert F. Gunia Deborah A. Docs
Vice President Secretary
PRUDENTIAL MUTUAL FUND SERVICES LLC
ATTEST:
By: /s/ Brian W. Henderson By: /s/ William V. Healey
------------------------- ----------------------
Brian W. Henderson William V. Healey
President Secretary
<PAGE>
EXHIBIT (i)(2)
CONSENT OF SWIDLER BERLIN SHEREFF FRIEDMAN, LLP
We hereby consent to the reference to our firm included in the prospectus
and statement of additional information of Prudential Government Income Fund,
Inc. filed as part of Registration Statement No. 2-82976 and to the use of our
opinion of counsel, incorporated by reference to Exhibit (i) to Post-Effective
Amendment No. 27 to the Registration Statement on Form N-1A (File No. 2-82976).
Swidler Berlin Shereff Friedman, LLP
/s/ Swidler Berlin Shereff Friedman, LLP
New York, New York
April 28, 2000
<PAGE>
EXHIBIT (j)
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form N-1A of our
report dated April 14, 2000, relating to the financial statements and financial
highlights of Prudential Government Income Fund, Inc., which appears in such
Registration Statement. We also consent to the references to us under the
headings "Investment Advisory and Other Services" and "Financial Highlights" in
such Registration Statement.
PricewaterhouseCoopers LLP
New York, New York
May 3, 2000
<PAGE>
EXHIBIT P(1)
PRUDENTIAL GOVERNMENT INCOME FUND, INC.
(THE FUND)
CODE OF ETHICS ADOPTED PURSUANT TO RULE 17j-1
UNDER THE INVESTMENT COMPANY ACT OF 1940
(THE CODE)
1. PURPOSES
The Code has been adopted by the Board of Directors/Trustees of the Fund,
in accordance with Rule 17j-1(c) under the Investment Company Act of 1940 (the
Act) and in accordance with the following general principles:
(1) THE DUTY AT ALL TIMES TO PLACE THE INTERESTS OF SHAREHOLDERS
FIRST.
Investment company personnel should scrupulously avoid serving
their own personal interests ahead of shareholders' interests in any
decision relating to their personal investments.
(2) THE REQUIREMENT THAT ALL PERSONAL SECURITIES TRANSACTIONS BE
CONDUCTED CONSISTENT WITH THE CODE AND IN SUCH A MANNER AS TO AVOID
ANY ACTUAL OR POTENTIAL CONFLICT OF INTEREST OR ANY ABUSE OF AN
INDIVIDUAL'S POSITION OF TRUST AND RESPONSIBILITY.
Investment company personnel must not only seek to achieve
technical compliance with the Code but should strive to abide by its
spirit and the principles articulated herein.
(3) THE FUNDAMENTAL STANDARD THAT INVESTMENT COMPANY PERSONNEL SHOULD
NOT TAKE INAPPROPRIATE ADVANTAGE OF THEIR POSITIONS.
Investment company personnel must avoid any situation that might
compromise, or call into question, their exercise of fully independent
judgment in the interest of shareholders, including, but not limited
to the receipt of unusual investment opportunities, perquisites, or
gifts of more than a DE MINIMIS value from persons doing or seeking
business with the Fund.
Rule 17j-1 under the Act generally proscribes fraudulent or
manipulative
<PAGE>
practices with respect to a purchase or sale of a security held or to be
acquired (as such term is defined in Section 2.) by an investment company, if
effected by an associated person of such company.
The purpose of the Code is to establish procedures consistent with the Act
and Rule 17j-1 to give effect to the following general prohibitions as set forth
in Rule 17j-1(b) as follows:
(a) It shall be unlawful for any affiliated person of or Principal
Underwriter for a registered investment company, or any affiliated person
of an investment adviser of or principal underwriter for a registered
investment company in connection with the purchase or sale, directly or
indirectly, by such person of a security held or to be acquired, by such
registered investment company:
(1) To employ any device, scheme or artifice to defraud such
registered investment company;
(2) To make to such registered investment company any untrue
statement of a material fact or omit to state to such registered
investment company a material fact necessary in order to make the
statements made, in light of the circumstances under which they are
made, not misleading;
(3) To engage in any act, practice, or course of business which
operates or would operate as a fraud or deceit upon any such
registered investment company; or
(4) To engage in any manipulative practice with respect to such
registered investment company.
2. DEFINITIONS
(a) "Access Person" means any director/trustee, officer, general
partner or Advisory Person (including any Investment Personnel, as that
term is defined herein) of the Fund, the Manager, the Adviser/Subadviser,
or the Principal Underwriter.
(b) "Adviser/Subadviser" means the Adviser or Subadviser of the Fund
or both as the context may require.
(c) "Advisory Person" means (i) any employee of the Fund,
2
<PAGE>
Manager or Adviser/Subadviser (or of any company in a control relationship
to the Fund, Manager or Adviser/Subadviser) who, in connection with his or
her regular functions or duties, makes, participates in, or obtains
information regarding the purchase or sale of a security by the Fund, or
whose functions relate to the making of any recommendations with respect
to such purchases or sales; and (ii) any natural person in a control
relationship to the Fund who obtains information concerning
recommendations made to the Fund with regard to the purchase or sale of
a security.
(d) "Beneficial Ownership" will be interpreted in the same manner as
it would be under Securities Exchange Act Rule 16a-1(a)(2) in determining
which security holdings of a person are subject to the reporting and
short-swing profit provisions of Section 16 of the Securities Exchange Act
of 1934 and the rules and regulations thereunder, except that the
determination of direct or indirect beneficial ownership will apply to all
securities which an Access Person has or acquires (Exhibit A).
(e) "Complex" means the group of registered investment companies for
which Prudential Investments Fund Management LLC serves as Manager;
provided, however, that with respect to Access Persons of the Subadviser
(including any unit or subdivision thereof), "Complex" means the group of
registered investment companies in the Complex advised by the Subadviser or
unit or subdivision thereof.
(f) "Compliance Officer" means the person designated by the Manager,
the Adviser/Subadviser, or Principal Underwriter (including his or her
designee) as having responsibility for compliance with the requirements of
the Code.
(g) "Control" will have the same meaning as that set forth in Section
2(a)(9) of the Act.
(h) "Disinterested Director/Trustee" means a Director/ Trustee of the
Fund who is not an "interested person" of the Fund within the meaning of
Section 2(a)(19) of the Act.
An interested Director/Trustee who would not otherwise be deemed to be
an Access Person, shall be treated as a Disinterested Director/Trustee for
purposes of compliance with the provisions of the Code.
(i) "Initial Public Offering" means an offering of securities
registered under the Securities Act of 1933, the issuer of which,
immediately before the registration, was not subject to the reporting
requirements of sections 13 or 15(d) of the Securities Exchange Act of
1934.
3
<PAGE>
(j) "Investment Personnel" means: (a) Portfolio Managers and other
Advisory Persons who provide investment information and/or advice to the
Portfolio Manager(s) and/or help execute the Portfolio Manager's(s')
investment decisions, including securities analysts and traders ; and (b)
any natural person in a control relationship to the Fund who obtains
information concerning recommendations made to the Fund with regard to the
purchase or sale of a security.
(k) "Manager" means Prudential Investments Fund Management, LLC.
(l) "Portfolio Manager" means any Advisory Person who has the direct
responsibility and authority to make investment decisions for the Fund.
(m) "Private placement" means a limited offering that is exempt from
registration under the Securities Act of 1933 pursuant to section 4(2) or
section 4(6) or pursuant to rule 504, rule 505 or rule 506 under such
Securities Act.
(n) "Security" will have the meaning set forth in Section 2(a)(36) of
the Act, except that it will not include shares of registered open-end
investment companies, direct obligations of the Government of the United
States, , short-term debt securities which are "government securities"
within the meaning of Section 2(a)(16) of the Act, bankers' acceptances,
bank certificates of deposit, commercial paper and such other money market
instruments as are designated by the Compliance Officer. For purposes of
the Code, an "equivalent Security" is one that has a substantial economic
relationship to another Security. This would include, among other things,
(1) a Security that is exchangeable for or convertible into another
Security, (2) with respect to an equity Security, a Security having the
same issuer (including a private issue by the same issuer) and any
derivative, option or warrant relating to that Security and (3) with
respect to a fixed-income Security, a Security having the same issuer,
maturity, coupon and rating.
(o) "Security held or to be acquired" means any Security or any
equivalent Security which, within the most recent 15 days: (1) is or has
been held by the Fund; or (2) is being considered by the Fund or its
investment adviser for purchase by the Fund.
3. APPLICABILITY
The Code applies to all Access Persons and the Compliance Officer shall
provide each Access Person with a copy of the Code. The prohibitions described
below
4
<PAGE>
will only apply to a transaction in a Security in which the designated
Access Person has, or by reason of such transaction acquires, any direct or
indirect Beneficial Ownership. The Compliance Officer will maintain a list of
all Access Persons who are currently, and within the past five years, subject to
the Code.
4. PROHIBITED PURCHASES AND SALES
A. INITIAL PUBLIC OFFERINGS
No Investment Personnel may acquire any Securities in an initial public
offering. For purposes of this restriction, "Initial Public Offerings" shall not
include offerings of government and municipal securities.
B. PRIVATE PLACEMENTS
No Investment Personnel may acquire any Securities in a private placement
without prior approval.
(i) Prior approval must be obtained in accordance with the
preclearance procedure described in Section 6 below. Such approval will
take into account, among other factors, whether the investment opportunity
should be reserved for the Fund and its shareholders and whether the
opportunity is being offered to the Investment Personnel by virtue of his
or her position with the Fund. The Adviser/Subadviser shall maintain a
record of such prior approval and reason for same, for at least 5 years
after the end of the fiscal year in which the approval is granted.
(ii) Investment Personnel who have been authorized to acquire
Securities in a private placement must disclose that investment to the
chief investment officer (including his or her designee) of the
5
<PAGE>
Adviser/Subadviser (or of any unit or subdivision thereof) or the
Compliance Officer when they play a part in any subsequent consideration of
an investment by the Fund in the issuer. In such circumstances, the Fund's
decision to purchase Securities of the issuer will be subject to an
independent review by appropriate personnel with no personal interest in
the issuer.
C. BLACKOUT PERIODS
(i) Except as provided in Section 5 below, Access Persons are
prohibited from executing a Securities transaction on a day during which
any investment company in the Complex has a pending "buy" or "sell" order
in the same or an equivalent Security and until such time as that order is
executed or withdrawn; provided, however, that this prohibition shall not
apply to Disinterested Directors/Trustees except if they have actual
knowledge of trading by any fund in the Complex and, in any event, only
with respect to those funds on whose boards they sit.
This prohibition shall also not apply to Access Persons of the
Subadviser who do not, in the ordinary course of fulfilling his or her
official duties, have access to information regarding the purchase and sale
of Securities for the Fund and are not engaged in the day-to-day operations
of the Fund; provided that Securities investments effected by such Access
Persons during the proscribed period are not effected with knowledge of the
purchase or sale of the same or equivalent Securities by any fund in the
Complex.
A "pending 'buy' or 'sell' order" exists when a decision to purchase
or sell
6
<PAGE>
a Security has been made and communicated.
(ii) Portfolio Managers are prohibited from buying or selling a
Security within seven calendar days before or after the Fund trades in the
same or an equivalent Security. Nevertheless, a personal trade by any
Investment Personnel shall not prevent a Fund in the same Complex from
trading in the same or an equivalent security. However, such a transaction
shall be subject to independent review by the Compliance Officer.
(iii) If trades are effected during the periods proscribed in (i) or
(ii) above, except as provided in (iv) below with respect to (i) above, any
profits realized on such trades will be promptly required to be disgorged
to the Fund.
(iv) A transaction by Access Persons (other than Investment Personnel)
inadvertently effected during the period proscribed in (i) above will not
be considered a violation of the Code and disgorgement will not be required
so long as the transaction was effected in accordance with the preclearance
procedures described in Section 6 below and without prior knowledge of
trading by any fund in the Complex in the same or an equivalent Security.
D. SHORT-TERM TRADING PROFITS
Except as provided in Section 5 below, Investment Personnel are prohibited
from profiting from a purchase and sale, or sale and purchase, of the same or an
equivalent Security within any 60 calendar day period. If trades are effected
during the proscribed period, any profits realized on such trades will be
immediately required to be disgorged to the Fund.
7
<PAGE>
E. SHORT SALES
No Access Person may sell any security short which is owned by any Fund in
the Complex. Access Persons may, however make short sales when he/she owns an
equivalent amount of the same security.
F. OPTIONS
No Access Person may write a naked call option or buy a naked put option on
a security owned by any Fund in the Complex. Access Persons may purchase options
on securities not held by any Fund in the Complex, or purchase call options or
write put options on securities owned by any Fund in the Complex, subject to
preclearance and the same restrictions applicable to other Securities. Access
Persons may write covered call options or buy covered put options on a Security
owned by any Fund in the Complex at the discretion of the Compliance Officer.
G. INVESTMENT CLUBS
No Access Person may participate in an investment club.
5. EXEMPTED TRANSACTIONS
Subject to preclearance in accordance with Section 6 below with respect to
subitems (b), (e), (f), (g) and (i) hereof, the prohibitions of Sections 4(C)
and 4(D) will not apply to the following:
(a) Purchases or sales of Securities effected in any account over
which the Access Person has no direct or indirect influence or control or
in any account of the Access Person which is managed on a discretionary
basis by a person other than such Access Person and with respect to which
such Access Person does not in fact influence or control such transactions.
(b) Purchases or sales of Securities (or their equivalents) which
8
<PAGE>
are not eligible for purchase or sale by any fund in the Complex.
(c) Purchases or sales of Securities which are non-volitional on the
part of either the Access Person or any fund in the Complex.
(d) Purchases of Securities which are part of an automatic dividend
reinvestment plan.
(e) Purchases effected upon the exercise of rights issued by an issuer
pro rata to all holders of a class of its Securities, to the extent such
rights were acquired from such issuer, and sales of such rights so
acquired.
(f) Any equity Securities transaction, or series of related
transactions effected over a 30 calendar day period, involving 500 shares
or less in the aggregate, if (i) the Access Person has no prior knowledge
of activity in such security by any fund in the Complex and (ii) the issuer
is listed on The New York Stock Exchange or has a market capitalization
(outstanding shares multiplied by the current price per share) greater than
$1 billion (or a corresponding market capitalization in foreign markets).
(g) Any fixed-income Securities transaction, or series of related
transactions effected over a 30 calendar day period, involving 100 units
($100,000 principal amount) or less in the aggregate, if the Access Person
has no prior knowledge of transactions in such Securities by any fund in
the Complex.
(h) Any transaction in index options effected on a broad-based index
(See Exhibit B.)(1)
(i) Purchases or sales of Securities which receive the prior approval
of the Compliance Officer (such person having no personal interest in such
purchases or sales), based on a determination that no abuse is involved and
that such purchases and sales are not likely to have any economic impact on
any fund in the Complex or on its ability to purchase or sell Securities of
the same class or other Securities of the same issuer.
(j) Purchases or sales of Unit Investment Trusts.
6. PRECLEARANCE
Access Persons (other than Disinterested Directors/Trustees) must preclear
all
---------------------------------
(1) Exhibit B will be amended by the Compliance Officer as necessary.
9
<PAGE>
personal Securities investments with the exception of those identified in
subparts (a), (c), (d), (h) and (j) of Section 5 above.
All requests for preclearance must be submitted to the Compliance Officer
for approval. All approved orders must be executed no later than 5:00 p.m. local
time on the business day following the date preclearance is granted. If any
order is not timely executed, a request for preclearance must be resubmitted.
7. REPORTING
(a) Disinterested Directors/Trustees shall report to the Secretary of the
Fund or the Compliance Officer the information described in Section 7(b) hereof
with respect to transactions in any Security in which such Disinterested
Director/Trustee has, or by reason of such transaction acquires, any direct or
indirect Beneficial Ownership in the Security ONLY if such Disinterested
Director/Trustee, at the time of that transaction knew or, in the ordinary
course of fulfilling his or her official duties as a Director/Trustee of the
Fund, should have known that, during the 15-day period immediately preceding or
subsequent to the date of the transaction in a Security by such
Director/Trustee, such Security is or was purchased or sold by the Fund or was
being considered for purchase or sale by the Fund, the Manager or
Adviser/Subadviser; provided, however, that a Disinterested Director/Trustee is
not required to make a report with respect to transactions effected in any
account over which such Director/Trustee does not have any direct or indirect
influence or control or in any account of the Disinterested Director/Trustee
which is managed on a discretionary basis by a person other than such
Director/Trustee and with respect to which such Director/Trustee does not in
fact
10
<PAGE>
influence or control such transactions. The Secretary of the Fund or the
Compliance Officer shall maintain such reports and such other records to the
extent required by Rule 17j-1 under the Act.
(b) Every report required by Section 7(a) hereof shall be made not later
than ten days after the end of the calendar quarter in which the transaction to
which the report relates was effected, and shall contain the following
information:
(i) The date of the transaction, the title and the number of shares, and
the principal amount of each Security involved;
(ii) The nature of the transaction (i.e., purchase, sale or any other
type of acquisition or disposition);
(iii) The price at which the transaction was effected;
(iv) The name of the broker, dealer or bank with or through whom the
transaction was effected; and
(v) The date that the report is submitted.
(c) Any such report may contain a statement that the report shall not be
construed as an admission by the person making such report that he or she has
any direct or indirect Beneficial Ownership in the Security to which the report
relates.
8. RECORDS OF SECURITIES TRANSACTIONS AND POST-TRADE REVIEW
Access Persons (other than Disinterested Directors/Trustees) are required
to direct their brokers to supply, on a timely basis, duplicate copies of
confirmations of all personal Securities transactions and copies of periodic
statements for all Securities accounts in which such Access Persons have a
Beneficial Ownership interest to the Compliance Officer. Such instructions must
be made upon becoming an Access Person and promptly as new accounts are
established, but no later than ten days after the end of a calendar quarter,
with respect to any account established by the Access
11
<PAGE>
Person in which any securities were held during the quarter for the direct or
indirect beneficial interest of the Access Person. Notification must be made
in writing and a copy of the notification must be submitted to Compliance.
This notification will include the broker, dealer or bank with which the
account was established and the date the account was established.
Compliance with this Code requirement will be deemed to satisfy the
reporting requirements imposed on Access Persons under Rule 17j-1(d), provided,
however, that such confirmations and statements contain all the information
required by Section 7. b. hereof and are furnished within the time period
required by such section.
The Compliance Officer will periodically review the personal investment
activity and holdings reports of all Access Persons (including Disinterested
Directors/Trustees with respect to Securities transactions reported pursuant to
Section 7 above).
9. DISCLOSURE OF PERSONAL HOLDINGS
Within ten days after an individual first becomes an Access Person and
thereafter on an annual basis, each Access Person (other than Disinterested
Directors/Trustees) must disclose all personal Securities holdings. Such
disclosure must be made in writing and be as of the date the individual first
became an Access Person with respect to the initial report and by January 30 of
each year, including holdings information as of December 31, with respect to the
annual report. All such reports shall include the following: title, number of
shares and principal amount of each security held, name of broker, dealer or
bank with whom these securities are held and the date of submission by the
Access Person.
10. GIFTS
12
<PAGE>
Access Persons are prohibited from receiving any gift or other thing of
more than $100 in value from any person or entity that does business with or on
behalf of the Fund. Occasional business meals or entertainment (theatrical or
sporting events, etc.) are permitted so long as they are not excessive in number
or cost.
11. SERVICE AS A DIRECTOR
Investment Personnel are prohibited from serving on the boards of directors
of publicly traded companies, absent prior authorization based upon a
determination that the board service would be consistent with the interests of
the Fund and its shareholders. In the limited instances that such board service
is authorized, Investment Personnel will be isolated from those making
investment decisions affecting transactions in Securities issued by any publicly
traded company on whose board such Investment Personnel serves as a director
through the use of "Chinese Wall" or other procedures designed to address the
potential conflicts of interest.
12. CERTIFICATION OF COMPLIANCE WITH THE CODE
Access Persons are required to certify annually as follows:
(i) that they have read and understood the Code;
(ii) that they recognize that they are subject to the Code;
(iii) that they have complied with the requirements of the Code; and
(iv) that they have disclosed or reported all personal Securities
transactions required to be disclosed or reported pursuant to the
requirements of the Code.
13. CODE VIOLATIONS
All violations of the Code will be reported to the Board of
Directors/Trustees of
13
<PAGE>
the Fund on a quarterly basis. The Board of Directors/Trustees may take
such action as it deems appropriate.
14. REVIEW BY THE BOARD OF DIRECTORS/TRUSTEES
The Board of Directors/Trustees will be provided with an annual report
which at a minimum:
(i) certifies to the Board that the Fund, Manager, Investment
Adviser/Subadviser, and Principal Underwriter has adopted procedures reasonably
necessary to prevent its Access persons from violating its Code.
(ii) summarizes existing procedures concerning personal investing and any
changes in the procedures made during the preceding year;
(iii) identifies material Code or procedural violations and sanctions
imposed in response to those material violations; and
(iv) identifies any recommended changes in existing restrictions or
procedures based upon the Fund's experience under the Code, evolving industry
practices, or developments in applicable laws and regulations.
The Board will review such report and determine if any further action
is required.
14
<PAGE>
EXPLANATORY NOTES TO CODE
1. No comparable Code requirements have been imposed upon Prudential Mutual
Fund Services LLC, the Fund's transfer agent, or those of its directors or
officers who are not Directors/Trustees or Officers of the Fund since they are
deemed not to constitute Access Persons or Advisory Persons as defined in
paragraphs (e)(1) and (2) of Rule 17j-1.
Dated: February 29, 2000
15
<PAGE>
EXHIBIT A
DEFINITION OF BENEFICIAL OWNERSHIP
The term "beneficial ownership" of securities would include not only
ownership of securities held by an access person for his or her own
benefit,whether in bearer form or registered in his or her own name or
otherwise, but also ownership of securities held for his or her benefit by other
(regardless of whether or how they are registered) such as custodians, brokers,
executors, administrators, or trustees (including trusts in which he or she has
only a remainder interest), and securities held for his or her account by
pledges, securities owned by a partnership in which he or she should regard as a
personal holding corporation. Correspondingly, this term would exclude
securities held by an access person for the benefit of someone else.
Ordinarily, this term would not include securities held by executors or
administrators in estates in which an access person is a legatee or beneficiary
unless there is a specific legacy to such person of such securities or such
person is the sole legatee or beneficiary and there are other assets in the
estate sufficient to pay debts ranking ahead of such legacy, or the securities
are held in the estate more than a year after the decedent's death.
Securities held in the name of another should be considered as
"beneficially" owned by an access person where such person enjoys "benefits
substantially equivalent to ownership". The SEC has said that although the final
determination of beneficial ownership is a question to be determined in the
light of the facts of the particular case, generally a person is regarded as the
beneficial owner of securities held in the name of his or her spouse and their
minor children. Absent special circumstances such relationship ordinarily
results in such person obtaining benefits substantially equivalent to ownership,
e.g., application of the income derived from such securities to maintain a
common home, to meet expenses which such person otherwise would meet from other
sources, or the ability to exercise a controlling influence over the purchase,
sale or voting of such securities.
An access person also may be regarded as the beneficial owner of securities
held in the name of another person, if by reason of any contact, understanding,
relationship, agreement or other arrangement, he obtains therefrom benefits
substantially equivalent to those of ownership. Moreover, the fact that the
holder is a relative or relative of a spouse and sharing the same home as an
access person may in itself indicate that the access person would obtain
benefits substantially equivalent to those of ownership from securities held in
the name of such relative. Thus, absent countervailing facts, it is expected
that securities held by relatives who share the same home as an access person
will be treated as being beneficially owned by the access person.
An access person also is regarded as the beneficial owner of securities
held in the name of a spouse, minor children or other person, even though he
does not obtain therefrom the aforementioned benefits of ownership, if he can
vest or revest title in himself at once or at some future time.
<PAGE>
EXHIBIT B
INDEX OPTIONS ON A BROAD-BASED INDEX
<TABLE>
<CAPTION>
TICKER SYMBOL DESCRIPTION
<S> <C>
NIK Nikkei 300 Index CI/Euro
OEX S&P 100 Close/Amer Index
OEW S&P 100 Close/Amer Index
OEY S&P 100 Close/Amer Index
SPB S&P 500 Index
SPZ S&P 500 Open/Euro Index
SPX S&P 500 Open/Euro Index
SXZ S&P 500 (Wrap)
SXB S&P 500 Open/Euro Index
RUZ Russell 2000 Open/Euro Index
RUT Russell 2000 Open/Euro Index
MID S&P Midcap 400 Open/Euro Index
NDX NASDAQ- 100 Open/Euro Index
NDU NASDAQ- 100 Open/Euro Index
NDZ NASDAQ- 100 Open/Euro Index
NDV NASDAQ- 100 Open/Euro Index
NCZ NASDAQ- 100 Open/Euro Index
SML S&P Small Cap 600
TPX U.S. Top 100 Sector
SPL S&P 500 Long-Term Close
ZRU Russell 2000 L-T Open./Euro
VRU Russell 2000 Long-Term Index
</TABLE>
<PAGE>
EXHIBIT P(2)
THE PRUDENTIAL INVESTMENT CORPORATION
PRUDENTIAL INVESTMENTS FUND MANAGEMENT LLC
PRUDENTIAL INVESTMENT MANAGEMENT SERVICES LLC
CODE OF ETHICS ADOPTED PURSUANT TO RULE 17j-1
UNDER THE INVESTMENT COMPANY ACT OF 1940
(THE CODE)
1. PURPOSES
The Code has been adopted by the Board of Directors/Trustees or the Duly
Appointed Officer-In-Charge of the Prudential Mutual Fund (hereinafter, referred
to as the "Fund"), the Manager, the Adviser/Subadviser, and the Principal
Underwriter in accordance with Rule 17j-1(c) under the Investment Company Act of
1940 (the Act) and in accordance with the following general principles:
(1) THE DUTY AT ALL TIMES TO PLACE THE INTERESTS OF SHAREHOLDERS
FIRST.
Investment company personnel should scrupulously avoid serving
their own personal interests ahead of shareholders' interests in any
decision relating to their personal investments.
(2) THE REQUIREMENT THAT ALL PERSONAL SECURITIES TRANSACTIONS BE
CONDUCTED CONSISTENT WITH THE CODE AND IN SUCH A MANNER AS TO AVOID
ANY ACTUAL OR POTENTIAL CONFLICT OF INTEREST OR ANY ABUSE OF AN
INDIVIDUAL'S POSITION OF TRUST AND RESPONSIBILITY.
Investment company personnel must not only seek to achieve
technical compliance with the Code but should strive to abide by its
spirit and the principles articulated herein.
(3) THE FUNDAMENTAL STANDARD THAT INVESTMENT COMPANY PERSONNEL SHOULD
NOT TAKE INAPPROPRIATE ADVANTAGE OF THEIR POSITIONS.
Investment company personnel must avoid any situation that might
compromise, or call into question, their exercise of fully independent
judgment in the interest of shareholders, including, but not limited
to the receipt of unusual investment opportunities, perquisites, or
gifts of more
<PAGE>
than a DE MINIMIS value from persons doing or seeking
business with the Fund.
Rule 17j-1 under the Act generally proscribes fraudulent or manipulative
practices with respect to a purchase or sale of a security held or to be
acquired (as such term is defined in Section 2.) by an investment company, if
effected by an associated person of such company.
The purpose of the Code is to establish procedures consistent with the Act
and Rule 17j-1 to give effect to the following general prohibitions as set forth
in Rule 17j-1(b) as follows:
(a) It shall be unlawful for any affiliated person of or Principal
Underwriter for a registered investment company, or any affiliated person
of an investment adviser of or principal underwriter for a registered
investment company in connection with the purchase or sale, directly or
indirectly, by such person of a security held or to be acquired, by such
registered investment company:
(1) To employ any device, scheme or artifice to defraud such
registered investment company;
(2) To make to such registered investment company any untrue
statement of a material fact or omit to state to such registered
investment company a material fact necessary in order to make the
statements made, in light of the circumstances under which they are
made, not misleading;
(3) To engage in any act, practice, or course of business which
operates or would operate as a fraud or deceit upon any such
registered investment company; or
(4) To engage in any manipulative practice with respect to such
registered investment company.
2
<PAGE>
2. DEFINITIONS
(a) "Access Person" means any director/trustee, officer, general
partner or Advisory Person (including any Investment Personnel, as that
term is defined herein) of the Fund, the Manager, the Adviser/Subadviser,
or the Principal Underwriter.
(b) "Adviser/Subadviser" means the Adviser or Subadviser of the Fund
or both as the context may require.
(c) "Advisory Person" means (i) any employee of the Fund, Manager or
Adviser/Subadviser (or of any company in a control relationship to the
Fund, Manager or Adviser/Subadviser) who, in connection with his or her
regular functions or duties, makes, participates in, or obtains information
regarding the purchase or sale of a security by the Fund, or whose
functions relate to the making of any recommendations with respect to such
purchases or sales; and (ii) any natural person in a control relationship
to the Fund who obtains information concerning recommendations made to the
Fund with regard to the purchase or sale of a security.
(d) "Beneficial Ownership" will be interpreted in the same manner as
it would be under Securities Exchange Act Rule 16a-1(a)(2) in determining
which security holdings of a person are subject to the reporting and
short-swing profit provisions of Section 16 of the Securities Exchange Act
of 1934 and the rules and regulations thereunder, except that the
determination of direct or indirect beneficial ownership will apply to all
securities which an Access Person has or acquires (Exhibit A).
(e) "Complex" means the group of registered investment companies for
which Prudential Investments Fund Management LLC serves as Manager;
provided, however, that with respect to Access Persons of the Subadviser
(including any unit or subdivision thereof), "Complex" means the group of
registered investment companies in the Complex advised by the Subadviser or
unit or subdivision thereof.
(f) "Compliance Officer" means the person designated by the Manager,
the Adviser/Subadviser, or Principal Underwriter (including his or her
designee) as having responsibility for compliance with the requirements of
the Code.
(g) "Control" will have the same meaning as that set forth in Section
2(a)(9) of the Act.
(h) "Disinterested Director/Trustee" means a Director/ Trustee of the
Fund who is not an "interested person" of the Fund within the
3
<PAGE>
meaning of Section 2(a)(19) of the Act.
An interested Director/Trustee who would not otherwise be deemed to be
an Access Person, shall be treated as a Disinterested Director/Trustee for
purposes of compliance with the provisions of the Code.
(i) "Initial Public Offering" means an offering of securities
registered under the Securities Act of 1933, the issuer of which,
immediately before the registration, was not subject to the reporting
requirements of sections 13 or 15(d) of the Securities Exchange Act of
1934.
(j) "Investment Personnel" means: (a) Portfolio Managers and other
Advisory Persons who provide investment information and/or advice to the
Portfolio Manager(s) and/or help execute the Portfolio Manager's(s')
investment decisions, including securities analysts and traders ; and (b)
any natural person in a control relationship to the Fund who obtains
information concerning recommendations made to the Fund with regard to the
purchase or sale of a security.
(k) "Manager" means Prudential Investments Fund Management, LLC.
(l) "Portfolio Manager" means any Advisory Person who has the direct
responsibility and authority to make investment decisions for the Fund.
(m) "Private placement" means a limited offering that is exempt from
registration under the Securities Act of 1933 pursuant to section 4(2) or
section 4(6) or pursuant to rule 504, rule 505 or rule 506 under such
Securities Act.
(n) "Security" will have the meaning set forth in Section 2(a)(36) of
the Act, except that it will not include shares of registered open-end
investment companies, direct obligations of the Government of the United
States, , short-term debt securities which are "government securities"
within the meaning of Section 2(a)(16) of the Act, bankers' acceptances,
bank certificates of deposit, commercial paper and such other money market
instruments as are designated by the Compliance Officer. For purposes of
the Code, an "equivalent Security" is one that has a substantial economic
relationship to another Security. This would include, among other things,
(1) a Security that is exchangeable for or convertible into another
Security, (2) with respect to an equity Security, a Security having the
same issuer (including a private issue by the same issuer) and any
derivative, option or warrant relating to that Security and (3) with
4
<PAGE>
respect to a fixed-income Security, a Security having the same
issuer, maturity, coupon and rating.
(o) "Security held or to be acquired" means any Security or any
equivalent Security which, within the most recent 15 days: (1) is or has
been held by the Fund; or (2) is being considered by the Fund or its
investment adviser for purchase by the Fund.
3. APPLICABILITY
The Code applies to all Access Persons and the Compliance Officer shall
provide each Access Person with a copy of the Code. The prohibitions described
below will only apply to a transaction in a Security in which the designated
Access Person has, or by reason of such transaction acquires, any direct or
indirect Beneficial Ownership. The Compliance Officer will maintain a list of
all Access Persons who are currently, and within the past five years, subject to
the Code.
4. PROHIBITED PURCHASES AND SALES
A. INITIAL PUBLIC OFFERINGS
No Investment Personnel may acquire any Securities in an initial public
offering. For purposes of this restriction, "Initial Public Offerings" shall not
include offerings of government and municipal securities.
B. PRIVATE PLACEMENTS
No Investment Personnel may acquire any Securities in a private placement
without prior approval.
(i) Prior approval must be obtained in accordance with the
preclearance procedure described in Section 6 below. Such approval will
take into account, among other factors, whether the investment
5
<PAGE>
opportunity should be reserved for the Fund and its shareholders and
whether the opportunity is being offered to the Investment Personnel by
virtue of his or her position with the Fund. The Adviser/Subadviser
shall maintain a record of such prior approval and reason for same, for
at least 5 years after the end of the fiscal year in which the approval
is granted.
(ii) Investment Personnel who have been authorized to acquire
Securities in a private placement must disclose that investment to the
chief investment officer (including his or her designee) of the
Adviser/Subadviser (or of any unit or subdivision thereof) or the
Compliance Officer when they play a part in any subsequent consideration of
an investment by the Fund in the issuer. In such circumstances, the Fund's
decision to purchase Securities of the issuer will be subject to an
independent review by appropriate personnel with no personal interest in
the issuer.
C. BLACKOUT PERIODS
(i) Except as provided in Section 5 below, Access Persons are
prohibited from executing a Securities transaction on a day during which
any investment company in the Complex has a pending "buy" or "sell" order
in the same or an equivalent Security and until such time as that order is
executed or withdrawn; provided, however, that this prohibition shall not
apply to Disinterested Directors/Trustees except if they have actual
knowledge of trading by any fund in the Complex and, in any event, only
with respect to those funds on whose
6
<PAGE>
boards they sit.
This prohibition shall also not apply to Access Persons of the
Subadviser who do not, in the ordinary course of fulfilling his or her
official duties, have access to information regarding the purchase and sale
of Securities for the Fund and are not engaged in the day-to-day operations
of the Fund; provided that Securities investments effected by such Access
Persons during the proscribed period are not effected with knowledge of the
purchase or sale of the same or equivalent Securities by any fund in the
Complex.
A "pending 'buy' or 'sell' order" exists when a decision to purchase
or sell a Security has been made and communicated.
(ii) Portfolio Managers are prohibited from buying or selling a
Security within seven calendar days before or after the Fund trades in the
same or an equivalent Security. Nevertheless, a personal trade by any
Investment Personnel shall not prevent a Fund in the same Complex from
trading in the same or an equivalent security. However, such a transaction
shall be subject to independent review by the Compliance Officer.
(iii) If trades are effected during the periods proscribed in (i) or
(ii) above, except as provided in (iv) below with respect to (i) above, any
profits realized on such trades will be promptly required to be disgorged
to the Fund.
(iv) A transaction by Access Persons (other than Investment Personnel)
inadvertently effected during the period proscribed in (i) above will not
be considered a violation of the Code and disgorgement will not be required
so long as the transaction was effected in accordance with the preclearance
procedures
7
<PAGE>
described in Section 6 below and without prior knowledge of
trading by any fund in the Complex in the same or an equivalent Security.
D. SHORT-TERM TRADING PROFITS
Except as provided in Section 5 below, Investment Personnel are prohibited
from profiting from a purchase and sale, or sale and purchase, of the same or an
equivalent Security within any 60 calendar day period. If trades are effected
during the proscribed period, any profits realized on such trades will be
immediately required to be disgorged to the Fund.
E. SHORT SALES
No Access Person may sell any security short which is owned by any Fund in
the Complex. Access Persons may, however make short sales when he/she owns an
equivalent amount of the same security.
F. OPTIONS
No Access Person may write a naked call option or buy a naked put option on
a security owned by any Fund in the Complex. Access Persons may purchase options
on securities not held by any Fund in the Complex, or purchase call options or
write put options on securities owned by any Fund in the Complex, subject to
preclearance and the same restrictions applicable to other Securities. Access
Persons may write covered call options or buy covered put options on a Security
owned by any Fund in the Complex at the discretion of the Compliance Officer.
G. INVESTMENT CLUBS
No Access Person may participate in an investment club.
5. EXEMPTED TRANSACTIONS
8
<PAGE>
Subject to preclearance in accordance with Section 6 below with respect to
subitems (b), (e), (f), (g) and (i) hereof, the prohibitions of Sections 4(C)
and 4(D) will not apply to the following:
(a) Purchases or sales of Securities effected in any account over
which the Access Person has no direct or indirect influence or control or
in any account of the Access Person which is managed on a discretionary
basis by a person other than such Access Person and with respect to which
such Access Person does not in fact influence or control such transactions.
(b) Purchases or sales of Securities (or their equivalents) which are
not eligible for purchase or sale by any fund in the Complex.
(c) Purchases or sales of Securities which are non-volitional on the
part of either the Access Person or any fund in the Complex.
(d) Purchases of Securities which are part of an automatic dividend
reinvestment plan.
(e) Purchases effected upon the exercise of rights issued by an issuer
pro rata to all holders of a class of its Securities, to the extent such
rights were acquired from such issuer, and sales of such rights so
acquired.
(f) Any equity Securities transaction, or series of related
transactions effected over a 30 calendar day period, involving 500 shares
or less in the aggregate, if (i) the Access Person has no prior knowledge
of activity in such security by any fund in the Complex and (ii) the issuer
is listed on The New York Stock Exchange or has a market capitalization
(outstanding shares multiplied by the current price per share) greater than
$1 billion (or a corresponding market capitalization in foreign markets).
(g) Any fixed-income Securities transaction, or series of related
transactions effected over a 30 calendar day period, involving 100 units
($100,000 principal amount) or less in the aggregate, if the Access Person
has no prior knowledge of transactions in such Securities by any fund in
the Complex.
(h) Any transaction in index options effected on a broad-based index
(See Exhibit B.)(1)
- --------
(1) Exhibit B will be amended by the Compliance Officer as necessary.
9
<PAGE>
(i) Purchases or sales of Securities which receive the prior approval
of the Compliance Officer (such person having no personal interest in such
purchases or sales), based on a determination that no abuse is involved and
that such purchases and sales are not likely to have any economic impact on
any fund in the Complex or on its ability to purchase or sell Securities of
the same class or other Securities of the same issuer.
(j) Purchases or sales of Unit Investment Trusts.
6. PRECLEARANCE
Access Persons (other than Disinterested Directors/Trustees) must preclear
all personal Securities investments with the exception of those identified in
subparts (a), (c), (d), (h) and (j) of Section 5 above.
All requests for preclearance must be submitted to the Compliance Officer
for approval. All approved orders must be executed no later than 5:00 p.m. local
time on the business day following the date preclearance is granted. If any
order is not timely executed, a request for preclearance must be resubmitted.
7. REPORTING
(a) Disinterested Directors/Trustees shall report to the Secretary of the
Fund or the Compliance Officer the information described in Section 7(b) hereof
with respect to transactions in any Security in which such Disinterested
Director/Trustee has, or by reason of such transaction acquires, any direct or
indirect Beneficial Ownership in the Security only if such Disinterested
Director/Trustee, at the time of that transaction knew or, in the ordinary
course of fulfilling his or her official duties as a Director/Trustee of the
Fund, should have known that, during the 15-day period immediately preceding or
subsequent to the date of the transaction in a Security by such
Director/Trustee, such
10
<PAGE>
Security is or was purchased or sold by the Fund or was being considered for
purchase or sale by the Fund, the Manager or Adviser/Subadviser; provided,
however, that a Disinterested Director/Trustee is not required to make a
report with respect to transactions effected in any account over which such
Director/Trustee does not have any direct or indirect influence or control or
in any account of the Disinterested Director/Trustee which is managed on a
discretionary basis by a person other than such Director/Trustee and with
respect to which such Director/Trustee does not in fact influence or control
such transactions. The Secretary of the Fund or the Compliance Officer shall
maintain such reports and such other records to the extent required by Rule
17j-1 under the Act.
(b) Every report required by Section 7(a) hereof shall be made not later
than ten days after the end of the calendar quarter in which the transaction to
which the report relates was effected, and shall contain the following
information:
(i) The date of the transaction, the title and the number of shares, and
the principal amount of each Security involved;
(ii) The nature of the transaction (i.e., purchase, sale or any other
type of acquisition or disposition);
(iii) The price at which the transaction was effected;
(iv) The name of the broker, dealer or bank with or through whom the
transaction was effected; and
(v) The date that the report is submitted.
(c) Any such report may contain a statement that the report shall not be
construed as an admission by the person making such report that he or she has
any direct or indirect Beneficial Ownership in the Security to which the report
relates.
8. RECORDS OF SECURITIES TRANSACTIONS AND POST-TRADE REVIEW
11
<PAGE>
Access Persons (other than Disinterested Directors/Trustees) are required
to direct their brokers to supply, on a timely basis, duplicate copies of
confirmations of all personal Securities transactions and copies of periodic
statements for all Securities accounts in which such Access Persons have a
Beneficial Ownership interest to the Compliance Officer. Such instructions must
be made upon becoming an Access Person and promptly as new accounts are
established, but no later than ten days after the end of a calendar quarter,
with respect to any account established by the Access Person in which any
securities were held during the quarter for the direct or indirect beneficial
interest of the Access Person. Notification must be made in writing and a copy
of the notification must be submitted to Compliance. This notification will
include the broker, dealer or bank with which the account was established and
the date the account was established.
Compliance with this Code requirement will be deemed to satisfy the
reporting requirements imposed on Access Persons under Rule 17j-1(d), provided,
however, that such confirmations and statements contain all the information
required by Section 7. b. hereof and are furnished within the time period
required by such section.
The Compliance Officer will periodically review the personal investment
activity and holdings reports of all Access Persons (including Disinterested
Directors/Trustees with respect to Securities transactions reported pursuant to
Section 7 above).
9. DISCLOSURE OF PERSONAL HOLDINGS
Within ten days after an individual first becomes an Access Person and
thereafter on an annual basis, each Access Person (other than Disinterested
Directors/Trustees) must disclose all personal Securities holdings. Such
disclosure
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<PAGE>
must be made in writing and be as of the date the individual first became an
Access Person with respect to the initial report and by January 30 of each
year, including holdings information as of December 31, with respect to the
annual report. All such reports shall include the following: title, number of
shares and principal amount of each security held, name of broker, dealer or
bank with whom these securities are held and the date of submission by the
Access Person.
10. GIFTS
Access Persons are prohibited from receiving any gift or other thing of
more than $100 in value from any person or entity that does business with or on
behalf of the Fund. Occasional business meals or entertainment (theatrical or
sporting events, etc.) are permitted so long as they are not excessive in number
or cost.
11. SERVICE AS A DIRECTOR
Investment Personnel are prohibited from serving on the boards of directors
of publicly traded companies, absent prior authorization based upon a
determination that the board service would be consistent with the interests of
the Fund and its shareholders. In the limited instances that such board service
is authorized, Investment Personnel will be isolated from those making
investment decisions affecting transactions in Securities issued by any publicly
traded company on whose board such Investment Personnel serves as a director
through the use of "Chinese Wall" or other procedures designed to address the
potential conflicts of interest.
12. CERTIFICATION OF COMPLIANCE WITH THE CODE
Access Persons are required to certify annually as follows:
(i) that they have read and understood the Code;
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(ii) that they recognize that they are subject to the Code;
(iii) that they have complied with the requirements of the Code; and
(iv) that they have disclosed or reported all personal Securities
transactions required to be disclosed or reported pursuant to the
requirements of the Code.
13. CODE VIOLATIONS
All violations of the Code will be reported to the Board of
Directors/Trustees of the Fund on a quarterly basis. The Board of
Directors/Trustees may take such action as it deems appropriate.
14. REVIEW BY THE BOARD OF DIRECTORS/TRUSTEES
The Board of Directors/Trustees will be provided with an annual report
which at a minimum:
(i) certifies to the Board that the Fund, Manager, Investment
Adviser/Subadviser, and Principal Underwriter has adopted procedures reasonably
necessary to prevent its Access persons from violating its Code.
(ii) summarizes existing procedures concerning personal investing and any
changes in the procedures made during the preceding year;
(iii) identifies material Code or procedural violations and sanctions
imposed in response to those material violations; and
(iv) identifies any recommended changes in existing restrictions or
procedures based upon the Fund's experience under the Code, evolving industry
practices, or developments in applicable laws and regulations.
The Board will review such report and determine if any further action
is required.
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EXPLANATORY NOTES TO CODE
1. No comparable Code requirements have been imposed upon Prudential Mutual
Fund Services LLC, the Fund's transfer agent, or those of its directors or
officers who are not Directors/Trustees or Officers of the Fund since they are
deemed not to constitute Access Persons or Advisory Persons as defined in
paragraphs (e)(1) and (2) of Rule 17j-1.
Dated: February 29, 2000
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EXHIBIT A
DEFINITION OF BENEFICIAL OWNERSHIP
The term "beneficial ownership" of securities would include not only
ownership of securities held by an access person for his or her own benefit,
whether in bearer form or registered in his or her own name or otherwise, but
also ownership of securities held for his or her benefit by other (regardless of
whether or how they are registered) such as custodians, brokers, executors,
administrators, or trustees (including trusts in which he or she has only a
remainder interest), and securities held for his or her account by pledges,
securities owned by a partnership in which he or she should regard as a personal
holding corporation. Correspondingly, this term would exclude securities held by
an access person for the benefit of someone else.
Ordinarily, this term would not include securities held by executors or
administrators in estates in which an access person is a legatee or beneficiary
unless there is a specific legacy to such person of such securities or such
person is the sole legatee or beneficiary and there are other assets in the
estate sufficient to pay debts ranking ahead of such legacy, or the securities
are held in the estate more than a year after the decedent's death.
Securities held in the name of another should be considered as
"beneficially" owned by an access person where such person enjoys "benefits
substantially equivalent to ownership". The SEC has said that although the final
determination of beneficial ownership is a question to be determined in the
light of the facts of the particular case, generally a person is regarded as the
beneficial owner of securities held in the name of his or her spouse and their
minor children. Absent special circumstances such relationship ordinarily
results in such person obtaining benefits substantially equivalent to ownership,
e.g., application of the income derived from such securities to maintain a
common home, to meet expenses which such person otherwise would meet from other
sources, or the ability to exercise a controlling influence over the purchase,
sale or voting of such securities.
An access person also may be regarded as the beneficial owner of securities
held in the name of another person, if by reason of any contact, understanding,
relationship, agreement or other arrangement, he obtains therefrom benefits
substantially equivalent to those of ownership. Moreover, the fact that the
holder is a relative or relative of a spouse and sharing the same home as an
access person may in itself indicate that the access person would obtain
benefits substantially equivalent to those of ownership from securities held in
the name of such relative. Thus, absent countervailing facts, it is expected
that securities held by relatives who share the same home as an access person
will be treated as being beneficially owned by the access person.
An access person also is regarded as the beneficial owner of securities
held in the name of a spouse, minor children or other person, even though he
does not obtain therefrom the aforementioned benefits of ownership, if he can
vest or revest title in himself at once or at some future time.
<PAGE>
EXHIBIT B
INDEX OPTIONS ON A BROAD-BASED INDEX
<TABLE>
<CAPTION>
TICKER SYMBOL DESCRIPTION
<S> <C>
NIK Nikkei 300 Index CI/Euro
OEX S&P 100 Close/Amer Index
OEW S&P 100 Close/Amer Index
OEY S&P 100 Close/Amer Index
SPB S&P 500 Index
SPZ S&P 500 Open/Euro Index
SPX S&P 500 Open/Euro Index
SXZ S&P 500 (Wrap)
SXB S&P 500 Open/Euro Index
RUZ Russell 2000 Open/Euro Index
RUT Russell 2000 Open/Euro Index
MID S&P Midcap 400 Open/Euro Index
NDX NASDAQ- 100 Open/Euro Index
NDU NASDAQ- 100 Open/Euro Index
NDZ NASDAQ- 100 Open/Euro Index
NDV NASDAQ- 100 Open/Euro Index
NCZ NASDAQ- 100 Open/Euro Index
SML S&P Small Cap 600
TPX U.S. Top 100 Sector
SPL S&P 500 Long-Term Close
ZRU Russell 2000 L-T Open./Euro
VRU Russell 2000 Long-Term Index
</TABLE>
